Inventory Forecasting — Everything You Should Know

Inventory forecasting allows you to predict when supply chains and consumer demand are going to change. However, what is it?

For this article, we are going to discuss what inventory forecasting is. We will discuss the importance and the different types of inventory forecasting. Additionally, we will tell you the best practices in forecasting and the benefits when you efficiently forecast your inventory. 

Once you are done reading this article, you will be able to have a greater knowledge of the importance of forecasting your inventory. Thus, you will be able to predict your supply chain which will help you meet your customers’ demands. 

What is Inventory Forecasting?

Inventory forecasting, also known as demand planning or demand forecasting, is a market research technique that accurately predicts future inventory needs. 

By analyzing past data, trends, and upcoming events, businesses can ensure sufficient product availability while avoiding excess inventory. 

This practice goes beyond setting reorder points and involves data analysis to identify patterns and adapt to dynamic conditions, meeting customer demand effectively. Effective inventory forecasting optimizes sales, reduces costs, and improves overall inventory management.

The Importance of Forecasting Your Inventory

Imagine you are the owner of a bustling retail store, offering a wide range of products that customers love. 

Your goal is to keep your shelves stocked with the right amount of inventory at all times. Too little, and you risk losing sales and disappointing customers. Too much, and you tie up valuable resources in excess stock, wasting money and storage space.

This is where inventory forecasting comes in, shining as a crucial tool in your arsenal. It is like having a crystal ball that allows you to peer into the future and make informed decisions about your inventory needs.

Inventory forecasting enables you to accurately predict the demand for your products in the coming weeks, months, or even years. 

By analyzing historical data, studying market trends, and considering upcoming events, you can identify patterns and anticipate fluctuations in customer demand. This invaluable insight empowers you to optimize your inventory levels and strike the perfect balance between supply and demand.

Accurate forecasting ensures that you have enough stock on hand to meet customer orders promptly. 

You will not have to worry about disappointing your loyal customers with empty shelves or frustratingly long waiting times. Instead, you will be able to fulfill their needs promptly, boosting customer satisfaction and loyalty.

Moreover, inventory forecasting helps you avoid excess inventory, which can be a drain on your financial resources. By accurately predicting demand, you can prevent overstocking and minimize the risk of unsold items sitting idly on your shelves. 

This way, you free up valuable capital that can be reinvested in other aspects of your business, such as marketing campaigns or expanding your product line.

Different Types of Inventory Forecasting

Below are the different types of inventory forecasting:

1. Trend Forecasting

Trends represent changes in product demand over time. By analyzing past sales and growth data, this method of forecasting identifies potential patterns while excluding seasonal variations and irregularities. 

With more detailed sales information, such as customer-specific and customer-type data, analysts can gain insights into future purchasing behavior. This data can be used to discover innovative marketing strategies and create targeted sales opportunities.

2. Qualitative Forecasting

When companies lack historical data, they go directly to the source: their customers. Qualitative forecasting often involves complex data collection, such as focus groups and market research. Forecasters then develop models based on this type of data.

3. Quantitative Forecasting

Quantitative forecasting, which relies on numerical data from the past, is generally considered more reliable than qualitative research alone. The abundance of data available allows for more precise forecasts. 

A specific type of quantitative forecasting is time-series forecasting, where historical quantitative data is used to create a model that predicts future trends.

4. Graph Forecasting

The data used by forecasters to analyze trends can also be plotted on a graph to display high and low points of sales. 

Graphs provide a visual representation of the data, allowing forecasters to easily identify patterns and gain valuable insights. By adding trend lines with slopes to the graphs, forecasters can examine potential directions that might not be apparent otherwise.

Best Practices in Forecasting Your Inventory

To help you in forecasting your demands, here are some practices that you may consider to make your forecasting more efficient:

1. Make a monthly process that you can repeat

To enhance the accuracy of demand forecasting, it is important to have a regular monthly process that reviews past forecasts and compares them to actual market results.

During this process, you collect information on when your predictions were correct or incorrect, as well as the market conditions at the time. 

By organizing these differences from highest to lowest, you can analyze the top 20% to understand why you were wrong and learn how to improve for future predictions.

2. Maintain accurate and real-time data

Using incorrect or insufficient data to create a demand strategy can lead to disastrous outcomes. It is crucial to ensure the accuracy of your calculations before making any decisions. Moving forward, it is important to establish a reliable and efficient data collection process.

Without accurate data, it is impossible to accurately estimate demand. The most effective demand forecasting techniques rely on current sales, inventory levels, raw materials, and other relevant data.

3. Understand your markets

Our world has become much smaller thanks to technological breakthroughs over the years. And this is a pattern that will undoubtedly persist. 

Neither your customers nor your supply chains are limited to local boundaries; they have a global reach. Understand how your products are performing in the worldwide market. Keep an eye on your competitors. 

Additionally, be aware of how macroeconomic trends could affect the business you conduct locally.

Lastly, evaluating demand errors at the customer level will help you better understand their causes and improve your workflow.

4. Integrate new technologies

Automation and machine learning are AI technologies that are rapidly advancing. It is not likely that robots will take over demand planner roles soon. 

However, these technologies have the potential to greatly change supply chain management and will continue to be increasingly important in the future. Demand forecasters need to be prepared.

To adapt to these changes, make sure your demand forecasting tools can adjust. Consider more than just how your software uses advanced analytics. Think about whether it can handle new developments. 

For example, how easy and fast are software updates to install? Your demand forecasting tools should be able to grow and assist you for years to come, regardless of the solution you have chosen.

Benefits of Demand Forecasting

By accurately predicting customer demand through inventory forecasting, you can ensure that you have enough products on hand to fulfill orders promptly. 

This means your customers will not have to wait or be disappointed due to out-of-stock items. Happy customers lead to repeat business and positive word-of-mouth, which ultimately boosts customer satisfaction and loyalty.

But inventory forecasting offers more than just customer satisfaction. It also helps you manage your costs effectively. By accurately anticipating demand, you can avoid overstocking, which would tie up your financial resources and lead to unnecessary storage costs. 

On the other hand, understocking can result in missed sales opportunities. With inventory forecasting, you can strike the right balance, optimizing your inventory levels and maximizing cost efficiency. Having accurate demand predictions also enables you to plan and make informed decisions. 

With insights into future demand trends and patterns, you can effectively plan production, adjust purchasing strategies, and manage your supply chain more efficiently. This helps you stay ahead of the game and respond to market demands in a timely manner.

Another benefit of inventory forecasting is reducing waste and obsolescence. By aligning your inventory levels with expected demand, you minimize the risk of products becoming outdated or unsellable. This not only saves you money but also reduces environmental impact by minimizing waste.

Inventory Forecasting Software

Below are different inventory forecasting software: 

1. Sap Integrated Business Planning

SAP IBP is a cloud-based solution that integrates inventory forecasting with advanced data analytics. It empowers businesses to anticipate customer demand, optimize inventory levels, and enhance supply chain efficiency by leveraging automated demand sensing and predictive analytics capabilities.

2. Oracle NetSuite

Oracle NetSuite offers a comprehensive inventory forecasting module that helps businesses optimize inventory levels, reduce stockouts, and improve order accuracy. It provides real-time visibility into demand, supply, and inventory data for accurate forecasting and planning.

3. Lokad

Lokad is a cloud-based inventory optimization software that provides demand forecasting and inventory modeling capabilities. It uses probabilistic forecasting techniques to anticipate demand variability and optimize inventory levels, helping businesses achieve higher service levels with minimal stockouts.

4. Anaplan Inventory Planning

Anaplan offers an inventory planning solution that includes forecasting capabilities. It helps businesses accurately forecast demand, optimize inventory levels, and improve supply chain efficiency through advanced analytics and collaborative planning.

5. DemandCaster

DemandCaster is a cloud-based inventory forecasting and supply chain planning software. It offers demand forecasting, inventory optimization, and supply chain collaboration features to help businesses improve forecast accuracy, reduce inventory costs, and enhance customer service.

Conclusion

Inventory forecasting is a crucial aspect of effective inventory management that empowers businesses to predict and adapt to changes in supply chains and consumer demand. Through methods such as trend forecasting, qualitative forecasting, and quantitative forecasting, companies can optimize their inventory levels, reduce costs, and enhance overall efficiency.

The benefits of accurate demand predictions include improved customer satisfaction, optimized cost management, and the ability to plan and make informed decisions. Utilizing advanced inventory forecasting software further enhances these capabilities, providing businesses with powerful tools to anticipate customer demand, optimize inventory levels, and enhance supply chain efficiency.