What is inventory forecasting and why is it inevitable for your business?

Feb 14, 2019

What is inventory forecasting?

Inventory forecasting refers to defining and predicting the inventory requirements for a future time period. It can be defined as a scientific approach of predicting sales for a specified future period and is largely based on the proposed marketing plan and a set of competitive factors. Inventory forecasting techniques are highly important from a wholesaler and distributor point of view. This is because inventory forecasting forms the foundation upon which the company’s market plan and revenue projections are built. Furthermore, the accuracy of inventory forecasting models adopted by the company can have a substantial impact on the company’s profitability.

Factors affecting inventory forecasting

Some of the key internal and external factors affecting inventory forecasting include:

  • Competition
  • Technological failures
  • Reputation
  • Labor issues
  • Seasonality of products
  • Change in government laws
  • Recession
  • Inflation
  • Supply chain related factors

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Advantages of inventory forecasting

Reduced stockouts

Retailers often face the situation of stockouts wherein they are unable to meet customer demands due to shortage of inventory. An accurate forecasting method not only ensures that retailers are rightly stocked up but also the inventory idle time in the warehouse is lesser.

Better manpower management

Manpower requirements of a company increase when a business starts to grow. Having the right inventory forecasting techniques help companies to stay prepared for inventory growth in the future by establishing appropriate manpower planning. Companies must ensure that they take measures to recruit more labor depending on the rise in demand.

Build pricing and promotion strategy

Promotion strategies that are planned and well-coordinated always yield better results. Integrated distributor-level promotions and related forecasts facilitate ensuring a better flow of goods. Consequently, the stock fill rates will also be higher.

Improve supplier negotiation

Supplier negotiations become easier when businesses are aware of the exact quantities that they are required to order. This also gives the suppliers a fair idea of the business that they can expect from the company which could prompt them to quote a better price. When negotiations are supported with data and logic, businesses position themselves as credible customers.

Plan sales strategies

Forecasting plays a pivotal role in areas including marketing, product design planning, and product management. The data derived from inventory forecasting can be used to make decisions related to pricing, promotions, and purchasing.

Improve production cycle efficiency

The company’s present inventory is closely monitored to make forecasts for the future. Analyzing the data in hand helps identify patterns in customer behavior, giving companies a chance to plan and improve their production cycles accordingly.

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Top inventory forecasting techniques

Quantitative forecasting

This inventory forecasting model is a mathematical method that is based on historical data. Here, past sales data is used as a parameter to predict future sales. The data sets chosen can vary depending on the company’s preferences (can either be a year old data or even a decade old data) but the larger the data set the more accurate will be the results. Although this inventory forecasting technique provides a basis for predicting demand, factors such as product seasonality and unexpected peak or fall in demand could cause variations.

Qualitative forecasting

This inventory forecasting model is less precise. It predicts demand based on factors that are less measurable including market forces, potential demand, and economic demand. This method takes years of practice and experience for inventory planners before they can make accurate predictions.

Trend forecasting

This type of inventory forecasting methods is used when a particular type of downward or upward trend in involved for a product. It involves anticipating future market trends that are most likely to have an impact on the business. These trends could either be short-term or long-term that exists over a greater period of time.

Graphical forecasting

This is concerned with converting data into a graphical representation that visually conveys a pattern. Generally, when data can be easily comprehended when they are visually represented. Using graphical representations, it becomes easier to understand data without analyzing data too much, making it simpler to make forecasts.

Inventory forecasting best practices

Some of the common best practices to follow while predicting the future demand and inventory levels include:

Observe the trends

Trends keep track of what is working in the market and what has become obsolete or outdated. By keeping a close watch on the changing trends in the market, companies can stock up on their products accordingly. This avoids the situations of understocking or overstocking. It is always advisable for businesses to not spend on low-value SKUs rather they should more focus should be given on products that are selling well.

Do not ignore data

Inventory forecasting methods need not always guarantee success. They are just an approximation and not accurate figures. However, going by the data and using statistical techniques help to reduce the uncertainty involved in forecasting inventory. So, companies must make it a point to always consider data before making forecasts for inventory.

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