Inventory forecasting: the what, why and how
What is inventory forecasting?
Inventory forecasting is the process of using historical data and trends to predict how much inventory you’ll need for an upcoming period. Accurate forecasting will ensure you have enough stock to fulfil orders without investing too much in unsold goods.
Why is forecasting inventory important?
A rough idea of how many units you’re likely to sell during a specific timeframe can help you avoid overstocking. Additionally, it decreases the cost of manufacturing and storing unsold products.
Streamlines the re-ordering process
Supports healthy cash flow
Accurate inventory forecasting ensures you have the correct quantity of items in stock. As a result, you don’t waste money on goods that won’t sell. Instead, you can invest the funds in other business activities that'll move the needle.
Decreases reaction time
By forecasting your inventory, you'll be able to respond more quickly to changes in your supply chain. You can adjust your approach when lead times increase, costs rise or the market shifts.
Inventory forecasting methods
Trend forecasting examines the demand for a product over time, considering peaks and valleys throughout the year. You’ll need at least two years of sales data to get an accurate overview, especially if your products sell well during specific seasons.
For example, you might discover that sales soared following a popular trend but are otherwise consistent.
If you don’t have enough sales data to forecast upcoming trends, you can use qualitative forecasting to gain insights into the current market. This method uses focus groups, surveys and external market research to predict future demand.
Quantitative forecasting uses numerical data to predict future demand. As well as using your historical data, you can tap into industry-wide statistics to get more accurate results.
Graphical forecasting plots your historical data on a visual graph so you can quickly identify sales patterns. The visual overview may help you spot something you missed in the numbers, complementing trend forecasting well.
Choosing the right forecasting method for inventory
Selecting the proper forecasting method for your company will depend on your business type, its history and how much data you have available. You can use trend forecasting if you have two or more years of sales data, while graphical forecasting shows you your unique sales patterns in a visual manner.
If you have very little sales data, use qualitative forecasting to get external market insights and predict demand. You should use a combination of methods to generate more accurate forecasts. Consider both quantitative and qualitative forecasting or combine trend forecasting with graphical forecasting to avoid missing anything.
Whichever method you choose, ensure you account for unpredictable trends and unexpected market shifts.
How to forecast inventory in 4 steps
1. Analyse trends in sales
Start by identifying sales patterns over a specific timeframe — usually 30 days, 90 days or 12 months. You can figure this out by looking at your average daily sales (either per item or category or across your entire product catalogue).
Use this formula to work out your average daily sales:
Total number of sales last year / 365 = Average daily sales
2. Calculate your lead time demand
Next, calculate how long it takes your suppliers to fulfil an order. By knowing the lead time, you can determine how many products you need on hand at any given time.
Use this formula to calculate lead time demand:
Average lead time in days x Average daily sales = Lead time demand
3. Calculate your safety stock
Then, it’s time to calculate your safety stock — the extra inventory that’ll reduce the risk of stocking out. This measurement needs to be as accurate as possible since too much will increase your holding costs, and too little will defeat the purpose of safety stock altogether.
Use this formula to calculate your safety stock:
(Maximum daily sales x Maximum lead time in days) - Lead time demand = Safety stock
4. Establish re-order points
Finally, establish your re-order point to know when to order more stock. As a result, your warehouse stock will remain constant but not stagnant.
Use this formula to calculate your reorder point:
Lead time demand + Safety stock = Reorder point
Best practices for inventory forecasting
Compare similar timelines
Use the same periods from each year to track data. For example, if you’re forecasting sales for the third quarter, base your research on sales data from the third quarter of last year. By doing so, you’ll account for seasonal fluctuations.
Involve all departments
Inventory forecasting impacts your entire business, so it’s essential to include all relevant areas of the business, such as finance, marketing, sales and operations. Involving all departments gives insight into sales and marketing activities or any operational issues that may affect inventory forecasting.
Trust your data
Accurate inventory forecasting relies on data — and lots of it. Make sure you have access to correct data about your supply chain, from sales per day to the average supplier lead time. Once you have all the necessary data, you can collate it for more accurate forecasting.
Use the right tools
With data spread across many platforms, it's nearly impossible to predict demand accurately. Instead, bring it together in one centralised location that core stakeholders can access.
Choose a tool with the proper functionality for your business based on your size, number of inventory items and sales volumes. Depending on your needs, this could be stand-alone inventory management software or a fulfilment solution that’s integrated with your other business management software.
Don't stop adjusting
Your forecasting will change throughout the year, and some trends may not repeat themselves. Keep tabs on your inventory levels so you can tweak and adjust them as needed.
Get control of your stock with MYOB
Forecasting inventory manually can be a challenging and unreliable process. Instead, choose inventory management software that’ll help you do this.
With MYOB’s inventory management software, you can look at historical sales and inventory figures to make future sales projections. You can also:
See what’s selling and what’s not
Know what your inventory levels are at a given time
Automate re-ordering to maintain safety stock
Benefit from powerful analytics
Disclaimer: Information provided in this article is of a general nature and does not consider your personal situation. It does not constitute legal, financial, or other professional advice and should not be relied upon as a statement of law, policy or advice. You should consider whether this information is appropriate to your needs and, if necessary, seek independent advice. This information is only accurate at the time of publication. Although every effort has been made to verify the accuracy of the information contained on this webpage, MYOB disclaims, to the extent permitted by law, all liability for the information contained on this webpage or any loss or damage suffered by any person directly or indirectly through relying on this information.