Running a business that carries inventory can be stressful. Not only does inventory tie up capital, and require space to store the actual physical product, but it is also difficult to forecast the future needs of your inventory. Dialing in your inventory forecasting is vitally important. Let’s review some common definitions, and inventory forecasting methodologies.
Why is Forecasting Inventory Challenging?
Forecasting inventory is challenging because forecasting is essentially predicting the future with known data. Think about the weather forecast. On Monday, the weather station may predict rain on Thursday. That prediction is based off of the current weather patterns, but those patterns can shift without notice. Instead of raining on Thursday, you may have a beautiful sunny day.
Forecasting inventory is no different. You make a prediction in the current month for a demand you will need at a later time. For example, imagine if you sell winter coats. In September you are getting your inventory ready for December. You predict you’ll sell 20 coats a day for the 31 days in December, or 620 coats.
What happens if it is a record-breaking cold winter, and your demand is actually 1,000 coats? How will you cover that shortage? In September, you had no idea how cold December would be, and how the freezing temperatures increased the demand for your product.
What Should You Consider With Inventory Forecasting
If you’re working on inventory forecasting, you must take numerous variables into consideration. There are countless variables that could be taken into consideration, it can feel a bit overwhelming. However, some of the most common variables include:
Seasonality plays a key role in ultimately determining the demand for your product. Following the winter coat example, you wouldn’t want to forecast high sales during June, July, and August!
Leveraging historical data is another great way to plan for your inventory needs. Use spreadsheet software, like Microsoft excel, to identify trends or patterns in the data. See how often the pattern appears, and use that to predict the future.
Follow Market Demand
If there are tough economic conditions and your item is a luxury item, you may expect slower sales. If the economy is booming, and you have the right product in the right market, you may want to add some additional padding, or a buffer, to your inventory forecast.
3 Inventory Forecasting Concerns
Buying inventory is an investment, and depending on your business, it could be a very large investment! There are a lot of concerns that you will need to address and plan for when forecasting inventory needs.
Too Much Inventory
You need to spend money to purchase the inventory. If you buy too much inventory, you tied up a lot of capital. Now that capital can’t be used for other investments, and that could hurt your business.
Too Little Inventory
On the complete opposite side of the coin, not having enough inventory is also a concern. If you don’t have the inventory, you can’t make the sale or generate the revenue. This too presents risks to your business. If your stock forecast was wrong, and you were too conservative in a time when you needed to be more aggressive, your business could suffer.
You need somewhere to put the inventory! You may be in a small facility that only has 10,000 square feet. If you order too much inventory, you may need 15,000 square feet to store that inventory!
Continuously Learn and Improve
There is not a company in the world that gets their inventory forecast 100% correct all the time. You need to constantly learn and improve your forecast. Keep thorough notes and look back on those notes at a later time.
Forecast the future, and when that future day occurs, look to see if your forecast was correct. If not, look to see what could have caused a discrepancy. Constantly learn from the mistakes and improve over time! You’ll never get this 100% perfect, but you will improve your forecast with time, and those improvements will have a profound positive impact on your business.