Imagine that your website is running a sale. The hyping has been done, and you have customers ready to buy. You are hopeful that the sale will go well. Your past customers complain about your brand on social media, and an email storm follows. As quickly as you thought you had stock ready to go, you discover there is none. This disaster was caused by your inefficient inventory management and lack of forecasting.
Poor inventory forecasting can negatively affect your business over time, even if you never encounter a problem this large. You may experience lowered cashflow, reputation damage, and customer frustration, causing them to turn to the competition. Managing stock can be a challenge for anyone. Small business owners experience it often. You can solve a lot of problems in your business with better inventory forecasting. As part of today’s lesson, we will discuss inventory forecasting: what it is, how it can benefit your business, and how it’s implemented. And if you need any third party inventory forecasting software for inventory forecasting, checkout Inventooly.
Describe inventory forecasting.
Forecasting inventory refers to determining how much inventory needs to be ordered when. You can boost revenue by forecasting inventory accurately, reducing costs, and planning for future demand. For example, for amazon stranded inventoryit will analyze sales history, demand trends, and lead times to forecast how much inventory you’ll need.
What are important terms in forecasting inventory?
Several important factors need to be taken into account when forecasting your inventory requirements. These factors are your sales history and trends, lead time, base demand, and reorder point. To gain a deeper understanding of the overall inventory forecasting process, let’s first define some terms you’ll run into in your own daily life.
Having an understanding of these terms will provide you with an easier time calculating critical pieces of the forecasting puzzle to increase your accuracy.
- Period of forecast. You’ll use this timeline to determine the amount of inventory you require. Depending on your production cycle and turnover rate, you may have to buy more inventory. This could happen 30 days in advance, 60 days in advance, or 90 days in advance.
- Sales on an average day. The average number of sales per unit during the forecast period is determined by dividing that number by the number of days during that same period.
- Lead time. You have a lead time when the inventory you ordered from a supplier takes a certain amount of time to arrive.
- Reordering point. By knowing this, you will know when your stock should be replenished to prevent running out.
- The sales trends. They will fluctuate frequently. You will be able to forecast customer buying patterns and habits throughout the year by monitoring how sales change over time.
- Stocks that provide safety. It’s your safety measure to prevent you from running out of products early. Overstocking can lead to space and money wastage. If you run out of something quicker than you expected, you may get into trouble with too little.
- The maximum level of stock. Fully stocked shelves are capable of fitting this many items (of one SKU).
- Number of days inventory has been sold. This is how long it typically takes you to sell off inventory.
In what way do you calculate inventory forecasting?
You can use the following formulas to help you forecast inventory in your business.
- Do a lead time demand calculation.
For one product, multiply your daily sales by your average lead time. To complete the formula, use historical sales data and sales fulfillment times from your vendors.
Formula for lead time demand (LTD)
Lead time (in days) = average daily unit sales x lead time (in days)
- Decide how much safety stock to keep.
Divide the maximum number of units you’ve sold in one day by the lead time you’d like to keep in safety stock. Add your average daily sales to the average lead time (in days). You can then subtract the product of the first and second calculations. Voilà, your safety stock level.
Formula for safe stock
Safety stock = (maximum sales on a daily basis x maximum lead time) – (average sales on daily basis x average lead time)
- Choose your reorder point.
According to market conditions and sales trends, your reorder point will fluctuate. It will be adjusted frequently. Add your safety stock to your daily unit sales average, then multiply it by your lead time.
Formula for reordering points (ROP)
ROP = safety stock + (average daily unit sales x lead time)
- Calculate your reorder quantity.
It’s time to reorder a popular product. But how do you know how much to order? You guessed it we have a formula for that. Keeping customers happy and eliminating unnecessary costs depend on placing the right order of inventory at the right time.
Formula for reorder quantity
Reorder quantity = average daily unit sales x average lead time
Inventory forecasting’s top benefits
You can boost your business by forecasting inventory in these five ways.
Inventory management is made easier by forecasting.
You can use inventory forecasting to figure out how much inventory you’ll need at a given point in time. Having an accurate forecast will help you determine what amount of inventory you should carry. Inventory holding costs will also be reduced. It won’t be a waste of money to pay for extra space if you know how much you need.
There will be less manual labor required in your business.
You can automate tasks that were otherwise done manually with inventory forecasting tools. You can improve your accuracy in projecting future sales by forecasting sales, revenue, and costs together. Accurately predicting demand will also prevent you from having to hire extra workers.
You will increase the efficiency of your production cycle.
Supply chain efficiency can also be improved by forecasting. Production, warehousing, and shipping suppliers will be better able to schedule jobs on time. To ensure there is enough stock available before a spike in demand occurs, you can contact your partners.
Stock outs will be minimized.
Running out of inventory is known as a stock out. The result of this can be a decline in sales and a feeling of dissatisfaction with your business from your customers. Forecasting correctly can help you avoid this. Deliver items to customers on time when orders arrive. Fulfill orders promptly as they are received. You will keep your customers happy and stop them from going to your competitors to get what they want when they want it. Using forecasting improves customer satisfaction overall.
Waste can be reduced.
Your business will have a better understanding of which products sell and which do not. Thus, planning for future orders and freeing up space for high-selling products will result in higher revenue.
This article provides straightforward formulas. One of the most challenging aspects is adapting to changing demands, which tend to fluctuate constantly. An inventory management system comes to the rescue here. With Inventooly, you don’t have to worry about crunching numbers, so you can spend your time on more important tasks. A program will help you keep track of what’s on hand, what’s on order, and when it’s time to restock.