A Comprehensive Guide to Inventory Forecasting
Inventory is a double-edged sword. It is the lifeblood of businesses that provide tangible, real-world products to their customers, and it is the reason for their existence and an impetus toward the enterprise’s overall success. But as the old saying goes, “All things in moderation.” Too much –or too little– inventory can be a major problem for your business and its ongoing operations. The secret to hitting that Goldilocks zone of on-hand inventory? Inventory forecasting.
Today, we’ll delve into the subject of Inventory demand planning, including what it is, how to be successful at it, and how proper inventory forecasting methods affect your larger logistical footprint.
Inventory Forecasting: a Definition
Inventory forecasting goes by many names: inventory demand planning, inventory demand forecasting, and supply chain forecasting. Despite its legion of synonyms, each title refers to approximately the same process: anticipating your ongoing raw material needs as well as the future market demand for your finished, saleable products.
Implementing successful inventory forecasting strategies into your business is as much an art as it is a science. An experienced industry professional can take a comprehensive long view of their business and its operations in order to gauge which way the wind is blowing, but when it comes to maintaining actual inventory levels, there are a host of tools and inventory forecasting methods that can help you move beyond the realm of an educated guess and into the realm of the data-driven solution.
In order to successfully forecast necessary inventory levels, you have to take a comprehensive view of your enterprise’s day-to-day operations. To achieve that, you must use historical data –and powerful data analytics– to help you parse macro-level trends in both procurement and sales. When coupled with tools and methodologies that help you pinpoint the market’s overall temperament, you’ve got the foundation for a solid inventory forecasting strategy.
The Benefits of Inventory Demand Forecasting
Staying solvent and profitable is at the top of every CFO’s to-do list. But with inventory representing such a large chunk of the company’s overhead (17-25%), it’s easy to see why solid inventory forecasting processes are so essential to the health of your enterprise. Here are some additional benefits associated with inventory demand planning.
Less dormant inventory
Maintaining proper inventory is like walking a tightrope; you don’t want to run out of product, but you don’t want materials lying dormant on your warehouse shelves for long periods either. The longer that something sits on your shelves, the greater the chance that it becomes obsolete inventory, meaning its value will nosedive. In fact, Manufacturing.net estimates that anywhere from 20-30% of all inventory becomes obsolete without some kind of actionable forecasting practices in place.
On the other side of the coin, you don’t want to run out of key products, especially in the face of surging customer demand. Inventory forecasting strategies can help you minimize and eliminate costly and damaging stockout periods.
Where does your inventory live? In the warehouse, of course, which requires manpower to run. Labor drives your warehousing practices, from basic maintenance to prepping goods for distribution. The greater accuracy you can bring to your forecast demand planning, the better you can adapt your warehouse’s workflows. Understanding the ebb and tide of your market allows you the added bonus of introducing systems of automation into your warehouse, drastically reducing ongoing labor costs.
Faster, more agile product cycles
The supply chain exists to introduce a level of predictability and consistency to our economy. Thorough knowledge of the precedent and antecedent links in the chain allows businesses to reach a global audience with their products and services. Inventory demand forecasting helps you and your business better anticipate your role in the supply chain and thus pivot more efficiently when the winds of change inevitably blow.
The Key to Better Inventory Forecasting
Now that we’ve examined exactly what inventory demand forecasting is and how implementing rigorous forecasting practices can benefit your company, let’s turn our attention toward the process of inventory demand planning itself.
There are four key elements that you should include in your inventory forecasting strategy. Those elements are:
- The forecast period
- Historical data
- Reorder point
- Lead time on materials and safety stock
Let’s explore each constituent part and examine it piece by piece.
The forecast period
In order to forecast effectively, you need to narrow your scope and decide on an appropriate interval to monitor. Ideally, the forecast period should be based on your enterprise’s footprint and sales volume. For example, an e-commerce shop with quick turnaround and surging sales will require a much smaller inventory forecast window than a large-scale company with brick-and-mortar locations.
Understandably, the greater your sales volume, the shorter your look-back period should be, as you’ll be compelled to reorder stock and materials much more often.
Once you’ve determined your forecast window, the next step in your inventory forecast strategy is to examine the sales activity and product trends that fall within your given time period.
When examining historical data, it’s useful to look at a wide range of metrics, including:
- Overall sales volume for the period
- Sales volume by category or SKU
- Frequency of past reorders
- Units per sale
- Holidays and other special promotions
This element is where AI and machine learning truly shine, picking apart macro-level trends that human analysts might otherwise miss when inventory demand planning.
Reorder point, lead time, and safety stock
The next element that you have to determine is your inventory’s reorder point. Think of the reorder point as the point of no return, at least where stock is concerned. It is a red flag warning to either reorder stock or risk a damaging stockout
While you could prospectively establish a reorder point based on your preferences and comfort level, in order to carry out inventory forecasting to the most efficient degree possible, you should follow a formula to determine the most actionable point of reorder. The most popular method for determining your reorder point involves the following formula:
Reorder point = lead time demand+safety stock
In this equation, lead time demand represents the amount of stock you expect to move during a set time period, while safety stock is the amount of inventory you hold in reserve.
Building a Better Inventory Forecasting Model
Inventory forecasting is equal parts science, equals parts creativity. A well-rounded forecasting methodology includes both quantitative forecasting based on data and historical trends, as well as qualitative forecasting based on overall market temperament mixed with instinct. It’s important to add the right tools and level of guidance to the equation, however.
Software platforms such as a warehouse management system (WMS) or an enterprise resource planner (ERP) can help you manage your inventory as well as the diverse array of data associated with your operations. If you need a partner to help guide you through a revamped forecasting program, Symbia Logistics can help. Contact us today to discuss our full range of logistical services.