Introduction to Inventory forecasting: How to Predict Demands

Introduction to Inventory forecasting: How to Predict Demands

How do you estimate the need of your customer for the future? Most retailers do not know this is very crucial to the monetary success of their retail business. Because if you have too little stock to fulfill orders, you can miss out on potential sales. Then having too much stock on hand becomes a financial burden because your money is all in your inventory. However, accurate inventory forecasting ensures you know the right amount of inventory to stock at the right time. Read on as we explore inventory forecasting, methods of predicting demands, and how to forecast customer demands.


What Is Inventory Forecasting?

Inventory Forecasting, also known as demand forecasting, is a process of determining your customer demands and predicting inventory levels over a specific period. Forecasting helps to understand the customer demands that may arise in the future based on the present sales. For example, children’s clothing brands understand that business ramps up around festive periods. So, they increase their stock to keep up with that demand. These forecasts are through a combination of looking through trends, customer purchase behavior, analyzing sales data, and other external conditions.


Why is Inventory Forecasting Important?

Avoid overstocking:

Having too much inventory on hand, though sometimes good, will tie up funds that may be for other equally important business operations and eat into your profit. Focusing on a data-driven strategy will give you a better idea of how much inventory you need to get you through a season. That way, you avoid buying in excess altogether. Your cash flow is improved significantly, and instead of buying products that would end up collecting dust, you can use them in other areas of your business. 

You save on Labor cost: 

Accurate inventory forecasting means you will be better prepared to handle changes in the demands of your products, which can reduce the amount of manual labor required. You save time and cost for warehouse staff and management.

Maintain Customers Satisfaction: 

Inventory forecasting helps you have the right amount of inventory on hand needed to fulfill customer orders as promised. With this, you give your customers a positive shopping experience and high customer retention rates. Overall, inventory forecasting is beneficial because it allows your business to maximize profits and reduce costs while helping you keep your customers happy and loyal.


Methods of Inventory Forecasting

There is no one such method that can successfully predict the demand of a company, but the two main methods of inventory forecasting are:


1. Qualitative Inventory Forecasting

Primarily involves analyzing historical sales data found in your point of sales system to estimate customer demand. The longer you have been tracking sales data, the larger your data set, the more accurate your predictions will be. The more data that is analyzed, the more precise the forecast will be. 

Analysts often look at sales history through different timelines to get an accurate estimate of inventory levels. If, for example, you have noticed that sales for a product or category have steadily increased over the past six months, it may be safe to order higher volumes of that product. If, however, sales have been steadily decreasing for a specific product or category, you might want to hold off on including them in your next purchase.


2. Qualitative Inventory Forecasting: 

Predicts demand based on a broad perspective of the industry and economy the business is operating. You may use qualitative forecasting when you do not have lots of sales data to draw on to make accurate predictions. It is also beneficial to look at qualitative information when external events have drastically changed how consumers buy. A most recent example being COVID.

Instead of sales data, qualitative forecasting relies on micro factors like market trends, current industry performance, regulation changes, expert opinions, and primary and secondary research. Quantitative forecasting uses data for a measurable answer, while qualitative forecasting uses available information to make an educated guess. 


Ultimately, retailers should use a balanced mix of quantitative and qualitative information in their decision-making. For example, using quantitative forecasting to reorder stock that is a surefire best-seller and using qualitative information to buy lower volumes of inventory you have never carried before. 


Bonus (Method) Mention

Collective Opinion Method:  Using estimates based on several factors like product designs, selling price, ad campaigns, etc., the salesman uses this method to predict future demand. The main principle in this method is that salesman are the closest to the customers. Thus, they can easily find out the reason for the changing preferences of a customer.


How to Forecast Inventory Demands

1. Gather Data

Look at the previous year to forecast accurately. If available, use the last couple of years’ sales information too. If you do not have data for up to a year, flex your qualitative muscle by directly reaching out to customers to learn what brand and products they would like to see. 

2. Identify Specific Seasons: 

Create a plan for your whole year and pay attention to seasons when you experience peaks at specific points in the year. For example, those who sell children’s clothes experience a surge in sales during festive seasons.

3. Check Average Sales: 

With the timeline you have settled with, calculate the average sales for the period across the last few years.

4. Monitor Trends: 

Identify any sales increases or decreases over the years. When you are mapping out the year, you have to pay attention to whether your product popularity is growing or not. For example, If you are currently seeing a lot of shifting demand and uncertainty, keep your forecast period long enough to get a clear picture of changing trends, but short enough that it keeps your current reality and economic conditions in focus. 

5. Calculate Lead Time: 

The time it takes your supplier to get your orders delivered to your warehouse is an essential piece of information to know. Whether it takes seven days or four weeks, you have to plan accordingly.

6. Plan for Promotions: 

If you plan to run any promotions or marketing campaigns during your specified period, be sure you quantify expected results and include them in your forecast.


Using Inventory Forecast Software

Not having to rely exclusively on your instinct makes inventory forecasting less difficult. Let us explore how ICG Software can make help with your inventory forecasting. 


ICG gives you access to sales data in two ways: one, through the built-in sales report in your POS systems, and two, ICG Analytics reports. Each of these ways can help you dig deep into your data to enrich your predictions. With the ability to set reorder points for any Stock Keeping Unit (SKU), you can set a prompter of a minimum amount of stock your inventory can have per time before reorder. It simplifies how you maintain enough inventory to support on-site and online demands. You get equipped with sales and out-of-stock reports, which give you information on the number of items you need restocking. ICG provides multiple stock reports that help unpredicted upswing demands, which prevents selling out in the future.


Remember: You must balance quantitative data with qualitative research to perfect your inventory forecasting during unpredictable times. Want to learn how we can help you ace inventory management for your online and brick-and-mortar store? Talk to a professional at