Accurate inventory forecasting is crucial to the monetary success of your ecommerce business. If you have too little inventory to fulfill orders, you’ll miss out on sales. But too much stock and you’re tying up capital that could be used to grow your business in other ways.
How do you find the sweet spot for inventory on-hand? Knowing how to accurately forecast inventory is a powerful skill that will help you do exactly that.
What is Inventory Forecasting?
Inventory forecasting, also known as demand forecasting, is the process of determining future customer demand and predicting inventory levels for a specific period of time. For example, bathing suit brands understand that business ramps up around summertime, so they increase their stock to keep up with that demand. In order to calculate this, you must take historic sales data, market trends, economic trends, upcoming promotions, and other external conditions into consideration.
Why is Inventory Forecasting Important?
When you are able to accurately forecast inventory demand, your business will benefit in significant ways. Here are a handful of those benefits and how they help your business:
You’ll need less inventory on-hand. Having a bunch of extra inventory on-hand will ensure that you don’t run out, but the storage fees you have to pay for will eat into your profits. Focusing on a data-driven strategy, you can have a better idea of how much inventory you actually need to get through a season. That way, you aren’t buying an excessive amount of products that collect dust and cost you money to store them. This means that you can improve your cash flow, and instead of paying high storage fees, you can use it in other areas of your business.
You’ll avoid overselling and maintain customer satisfaction. If you have the inventory on-hand that your forecasting calls for, you won’t have to be concerned with overselling. You’ll have the inventory needed to fulfill customer orders as promised, which ensures a positive shopping experience and high customer retention rates.
You’ll save on warehousing and labor costs. Accurate inventory forecasting means that you’ll be better prepared to handle changes in demand for your products, which can reduce the amount of manual labor required in your warehouse. This, in turn, saves time and manpower for warehouse staff and management, ultimately lowering your costs.
Overall, inventory forecasting is beneficial because it allows your business to maximize profits and reduce costs, all while helping you keep your customers happy and loyal.
How to Forecast Inventory Demand
Learning how to forecast inventory demand can seem pretty daunting at first, and rightfully so. It can be a complicated process that’s hard to get right. However, when you have the right knowledge, skills, and tools, the whole process is much simpler.
There are various methods that are used for inventory forecasting. The best methods are data-driven, because they take into account factors like your sales history, market trends, guaranteed sales for contracts or subscriptions, the global economy, and any planned marketing promotions.
Here are the steps to accurately forecast inventory demand for your ecommerce business:
- Gather Data: Look at the previous year (at least) to forecast accurately. If available, use the last few years’ sales information too.
- Identify Specific Seasons: Map out the complete year and pay attention to seasonality. Maybe you have peaks at certain points in the year. For example, if you sell beach toys, you can expect a surge of sales in mid-spring to late summer.
- Average Sales: With the timeline you’ve chosen, calculate the average sales for the period across the last few years.
- Monitor Trends: Identify any sales increases or decreases over the years. When you’re planning for this year, you have to understand if your product’s popularity is growing or not. For example, if there is a really big solar eclipse or other type or big event happening that year, you can ensure you’re prepared for a surge in demand.
- Calculate Lead Time: This is an essential piece of information to know – how long does it take for your supplier to get your orders to your warehouse. Whether it takes 10 days or 3 weeks, you have to plan accordingly.
- Plan for Promotions: If you are planning to run any promotions or marketing campaigns during your specified time period, be sure you quantify expected results and include them in your forecast.
There are a lot of moving parts in forecasting inventory demand, and it can feel like you’re shooting at a moving target. Having the right tools for the job will help you immensely. Centralizing your data across all your sales channels with an inventory management software solution will make the task much easier. The solution you choose should have all the functionality that’s appropriate for your business’s size, sales volume, and product catalog. A robust inventory management tool like ecomdash’s will help you optimize this important function.
Final Thoughts about Inventory Forecasting
No one can see into the future. There isn’t a crystal ball for estimating inventory demand. However, when you have the right tools and skills, you can calculate estimates that will help you plan more accurately. By consistently reviewing your inventory turnover, trends in customer orders, stock counts, and the other aspects covered above, your short-term and long-term inventory forecasting will be much more precise.