Inventory forecasting is a practice where you use data to predict your necessary future inventory. Specifically, it involves refraining from unproductive inventory by leveraging historical data and staying informed about emerging trends and upcoming events.
Inventory forecasting is a safeguard against under- or overstocking. When employed effectively, this practice reduces waste and helps ensure that cash is not tied down unnecessarily.
To forecast your inventory accurately, you need to do more than identify a reorder point. Inventory forecasting is about more than inventory replenishment. You need to conduct data analysis to identify trends and adapt to changing customer demand and conditions.
Inventory forecasting benefits
The purposes of inventory forecasting are threefold:
- Minimize your holding costs
- Minimize lost sales revenue
- Reduce product waste
Accounting for uncertainty
Any business producing at scale must consider sound inventory forecasting strategies. However, the advantages are even more critical for companies that experience fluctuating demand. Inventory forecasting is used to account for:
- Historical data
- Seasonal fluctuations
- Other external factors
Reducing inventory needs
With competent inventory forecasting, you don’t need a giant warehouse full of products collecting dust. Using data to maintain an adequate inventory is more profitable and more straightforward. With inventory forecasting, you ensure that you don’t purchase unnecessary stock. This is a crucial step toward balancing your cash flow.
Less labor
Lower and more efficiently managed inventory translates into less labor. Warehousing costs are reduced through fewer special requirements. Similarly, needing less time spent handling inventory means employees' attention can be directed elsewhere.
Predicting labor needs is closely connected to predicting inventory needs. Moreover, while the analysis takes time, stock management requires fewer resources as inventory forecasting helps:
- Predict changes in order volume
- Automate reordering
- Reduce inventory carrying costs
All of this reduces your warehouse management and staffing needs.
Fewer stockouts
Ideally, inventory forecasting must eliminate stock-outs/back orders. Adequate inventory levels contribute to a more fluid cash flow.
Additionally, eliminating back orders may further improve profitability by increasing customer satisfaction.
Inventory forecasting vs demand forecasting
Demand forecasting determines approximate customer demand for a product or service. Inventory forecasting estimates the necessary stock levels to predict demand while also minimizing the costs of carrying inventory and the risk of running out of stock.
How to forecast inventory?
Often, inventory management relies on intuition and practical knowledge. However, there are four concrete approaches to inventory forecasting based on data to remove any guesswork.
Quantitative forecasting
Quantitative forecasting applies historical sales data to predict future sales. With an extended period of operation, your business will have access to more information, leading to improved forecasting abilities.
You need at least one year’s data to gain valuable insights. Accounting for seasonal variation, for example, requires at least one year. But in the end, the more data, the better.
Quantitative forecasting is most often more accurate than alternatives. However, require adequate historical data for it to be meaningful.
Qualitative forecasting
Qualitative forecasting employs order history information and relies on the research of external factors like: market trends, economic trends, environmental factors and other macroeconomic factors.
Expert analysts are consulted for thorough and meaningful qualitative forecasts. This method is more demanding and requires more skill than quantitative forecasting, but it presents a solid alternative to quantitative forecasting when you lack the history to conduct it.
Trend forecasting
Trend forecasting uses sales trends and market growth data to predict future inventory requirements. It requires your business to closely monitor sales data and big-picture changes such as consumer behavior trends. This means going beyond seasonal changes, which are excluded, and delving into market-wide trends.
Trend forecasting uses granular sales data. Marketers then use that data to prepare for emerging trends and benefit from them. For the same reason, predicting future demand makes inventory management more efficient.
Graphical forecasting
Graphical forecasting refers to the process of converting sales history into visual representations. This strategy guarantees that everything important is noticed when represented solely in written form.
The use of graphical forecasting is a simple and uncomplicated task. It automatically generates trend lines and visual representations of noteworthy trends that should be explored further.
Which inventory management method is the best for you?
Data is vital to the success of any organization. Which inventory forecasting method you use is based on what data is available to you.
We always suggest extensive market research as well as forecasting for pricing and inventory. Simon-Kucher offers commercial growth strategies to help consumer businesses to thrive amid intensifying market factors.
Understanding your price elasticity
Understanding price elasticity allows you to better anticipate how changes in pricing will affect sales volume, which helps improve the accuracy of inventory forecasts.
Price elasticity measures how changes in price relate to changes in demand. If demand for a product is highly elastic, a small price change may result in a large change in demand.
Understanding your business's price elasticity is another factor that requires data analysis. Several factors contribute to price elasticity:
- The availability of alternatives
- Whether you’re selling an essential or a luxury product
- Customer incomes
- Market trends
Price elasticity has implications for your inventory, discount, and pricing strategies. We can help you determine your price elasticity and walk you through the data's implications.
Improving your pricing and sales strategies
Lastly, inventory forecasting is closely related to your pricing and sales strategies. Reducing surplus inventory poses challenges in both sales and forecasting.
We often help companies stimulate product demand to reduce excess inventory. Dynamic pricing strategies and promotions typically play a key role in this process.
Dynamic pricing strategies enable your business to adjust prices proactively as external factors change. This is one of the key ways you can control your inventory and avoid excess. Companies aiming to achieve this alongside higher profits can use:
- Discount pricing strategies
- Bundle offers
- Price optimization
Simon-Kucher’s growth solutions allow you to capture significant opportunities by optimizing every lever of your commercial strategy. Contact us today to find out how our powerful insights can enable you to create confident pricing, sales, and marketing strategies. Contact us today.
