Data-driven inventory forecasting can make the difference between struggling and thriving for eCommerce businesses. Understanding inventory forecasting best practices and implementing them to enhance your inventory planning and optimization are critical steps in growing your online store.
What is inventory forecasting?
Inventory forecasting uses historical data, seasonal trends, market forces, and predictions of future demand to project the amount of stock you need for each SKU in the next month, quarter, or year. To keep up with the speed of modern eCommerce, it’s essential to use the inventory forecasting tools built into your inventory management software, so your forecasts are based on evidence rather than intuition.
Established online retailers can use past sales velocity as a jumping-off point for inventory forecasting. If your business is a startup or venturing into new markets, you’ll need to rely on market research and third-party industry data for your initial demand forecasts.
Forecast vs. replenishment
Inventory forecasting can guide your inventory management and help you set optimal stock levels you’ll need for the next inventory period. Inventory replenishment describes the steps you take to put more inventory on the shelves (calculating inventory lead time, sourcing raw materials, placing an order with the factory, arranging freight forwarding, etc.).
Your inventory forecasts will shape your inventory replenishment plan.
Benefits of accurate inventory forecasts
Accurate inventory forecasting is critical to the health of your eCommerce company. Here are just three of the ways that businesses benefit.
Predict and meet customer demand
To keep your customers happy, you must have the products they want in stock when they want to place their orders. Inventory forecasting helps you prepare for customer demand, so you don’t lose sales to your competitors or make customers wait for backorders.
Leverage inventory management to improve cash flow
The pandemic may have killed just-in-time inventory, but defaulting to a just-in-case model can crush your business development. Tying up too much capital in stock can constrict your promotions budget, harming your ability to attract new customers. Plus, you can end up with deadstock. Deadstock is items that sit on the shelf so long that they go out of style and become unsaleable.
When you base your inventory management on an accurate forecast, you can make a plan that keeps all your SKUs in stock and available for pick and pack fulfillment while preserving an ideal inventory turnover rate.
Better supply chain management
When you accurately predict customer demand, you can calibrate your supply chain to the perfect Goldilocks state: not too much inventory or too little. Inventory forecasting combined with a clear understanding of your manufacturing lead time allows you to avoid rush charges and improve your working relationships with your suppliers.
Inventory forecasting methods
There are five primary inventory forecasting models. These aren’t standalone; an inventory forecasting best practice is to combine multiple approaches to develop more accurate inventory forecasts.
Quantitative forecasting
Quantitative inventory forecasting projects future sales using your sales history. If you have many years of historical data to draw on, you can often paint a fuller picture. However, your data analysis should be based on a relevant period. For instance, if the sales velocity of a particular SKU changed dramatically due to shifts in consumer shopping patterns two years ago, data from six years ago might not provide accurate demand forecasting.
Qualitative forecasting
Qualitative inventory forecasting predicts consumer demand using external data points such as economic trends, changes in import treaties, political issues that impact the market, or inflation.
The qualitative factors that can have a significant impact on inventory forecasting include inflation, employment statistics, events like Brexit, wars, and shifts in geopolitical alliances. If you fail to see significant political or economic shifts coming, you could be blindsided. That could leave you with unsalable inventory or prevent you from meeting increased demand.
However, neither qualitative nor quantitative forecasting will give you enough information to accurately predict customer demand. An inventory forecasting best practice is to combine these two inventory forecasting techniques.
Trend forecasting
Trend forecasting digs deep into your sales data and trends in your product category to chart changes in product demand and consumer behavior. A trend forecast might project buying trends for specific customer profiles to help predict future demand. Trend forecasts draw on historical sales data for an analysis that factors in changes in sales velocity over long periods of time rather than seasonal demand shifts.
Seasonal forecasting
Seasonal inventory forecasting uses seasonal sales data and information about future events to forecast demand. Factors like upcoming holidays, the timing of major sales seasons, such as the weeks between Thanksgiving and Christmas, and weather conditions can impact seasonal forecasting.
If your sales fluctuate significantly based on the season, create your forecast using historical data from the same season for as many years as is feasible. Most eCommerce companies separate their seasonal data by quarter.
Graphical forecasting
Graphical inventory forecasting is typically broken out as a separate method, but it’s more of a technique for visualizing temporal quantitative data and other information gathered through complex data collection. Trend forecasts may lend themselves to graphic displays such as line graphs or different types of visualizations. Graphical forecasting can be used to show historic sales data and map out potential scenarios for future customer demand. Data visualization is an inventory forecasting best practice.
5 inventory forecasting best practices in eCommerce
The first and most critical inventory forecasting best practice is to make inventory forecasts a routine part of your eCommerce planning. Here are some additional best practices to ensure that you can predict future trends and get the insights you need to grow and scale your business.
Set a forecast period
Start by determining the forecast period that will give you the best actionable data. Standard inventory forecast periods are 30 days, 60 days, quarterly, or annual. A shorter forecast window will give you more up-to-the-minute inputs, including recent sales data and market trends. However, your manufacturing lead time and product type may require a longer forecast period. For example, a fast fashion brand that brings out new styles every month will need inventory forecasts every month. A brand that sells durable goods with a long manufacturing lead time will likely require projects a quarter or a year in advance. It will take that long to prepare its supply chains to deliver products on schedule.
Base demand forecasting on accurate inventory data
No matter what inventory forecasting method you use, you’ll want precise inventory counts as your starting point. Your recorded inventory could be off because of shrinkage or inadequate inventory management practices at your order fulfillment warehouse. That could keep you from being able to formulate an accurate forecast.
Your 3PL is a crucial partner in accurate inventory forecasting. Working with a fulfillment company with a high level of inventory accuracy is essential to your demand planning.
Work with marketing and other teams to include all factors relevant to future demand
Predicting future demand isn’t just about historical sales data and relevant external factors. Include internal planning in your inventory forecasting so you’re prepared to meet increased demand from a successful marketing effort. Facilitate open communication between departments so you can include factors like internal capacity and the effect of promotional campaigns on potential inventory needs.
Calibrate your supply chain to meet consumer demand
Use your inventory forecasting as a guide to fine-tune your supply chain. You might find that the speed of fluctuations in sales requires a shorter lead time. Short lead times allow you to pivot to meet consumer demand quickly. Share your inventory forecasting with your supply chain partners and enlist their help to create an inventory plan that sets realistic delivery times, reorder points, and stock levels to ensure customer satisfaction.
Continuously adjust your inventory forecasting model
Staying nimble is a vital inventory forecasting best practice. Conduct post-mortems on your inventory forecasts to see how well they matched consumer demand. You may need to adjust your inventory forecasting methods or data inputs to tune your results. And, even when you’re comfortable with your inventory forecasting methodology, check demand forecasting against actual results and make adjustments. ECommerce changes fast, and your inventory forecasts need to keep up.
How Red Stag Fulfillment helps eCommerce businesses achieve inventory accuracy
Your eCommerce fulfillment provider is a crucial partner for inventory forecasting. At Red Stag Fulfillment, we are always looking for ways to improve our services. That means seeking ways to help our clients enhance their logistics and expand their businesses. We had a 99.991% inventory accuracy rate in 2021. Plus, we provide consistently outstanding 3PL services backed by our unmatched fulfillment guarantees.
Red Stag Fulfillment is the top U.S. fulfillment provider for heavy, bulky, fragile, and high-value products. You need accurate fulfillment to support your inventory forecasting best practices, and we’re here to help.
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