When you first started your eCommerce business, your inventory planning process might have been as simple as ordering inventory on a wish and a prayer. Once you’ve established your business, however, you need to plan ahead. Inventory forecasting is an important component of your business planning and inventory management.
What is inventory forecasting and planning?
Inventory forecasting is the process of calculating how much inventory you will need to meet future sales demands. It is a key element of good inventory management. The process is also referred to as inventory planning. Good inventory forecasting ensures that you will always have enough stock on hand, plus safety stock to handle the unexpected. Inventory control is essential to ensure that your order fulfillment can keep up with your sales. At the same time, inventory forecasting helps you avoid over-buying and having products sit on the shelves gathering dust.
Inventory planning is complicated by seasonal sales trends, promotions, wholesale orders, and supply chain glitches. However, if you have a robust process in place, you can smooth over most of the bumps.
Here’s what you need to know to use the power of inventory forecasting to grow your eCommerce company.
How inventory forecasting can help you run your eCommerce business more efficiently
If you want to just order a lot of stock at the beginning of the year and cross your fingers that it will all sell – but not too fast – that’s understandable. Inventory forecasting involves some complex calculations. Fortunately, there’s inventory management software that can help you with the math. And there are compelling reasons to improve your inventory forecasting.
When you don’t forecast the demand for your products, you can end up with empty warehouse shelves at a crucial moment. That can lead to backorders. Or, worse, you could lose orders to competitors who have similar products in stock. Inventory forecasting helps you reduce your chances of running out of popular products.
Save on rush charges and expedited shipping
An unanticipated burst of sales is a nice problem to have. However, when you run out of stock or run low unexpectedly, catching up can eat into your profits. You might incur rush charges to get a faster turnaround from your suppliers. And, to meet customer expectations, you might have to pay for expedited shipping.
Understand your optimal stock levels and reorder points
Inventory forecasting helps you understand the flow of goods through your business. With good data, you can create forecasts that help you set optimal inventory levels. You can set your safety stock level and know when it’s time to reorder. Inventory planning takes a lot of the stress out of running an eCommerce business.
Improve your business finances
One of the most important inventory forecasting uses is to optimize your cash flow. By predicting future demand, you don’t tie up more capital than you need to in stock. At the same time, your data analysis allows you to forecast inventory flow and plan ahead to have enough product on hand to meet consumer demand.
Factors to consider in your inventory forecasting
One of the challenges of inventory planning is that it’s impossible to predict the future with 100% accuracy. However, historical data will reveal seasonal sales trends. Combine your sales history with your future promotional plans you have the basis for data-driven inventory management. Here are some of the factors to consider.
Economic order quantity
Economic order quantity is a technique that allows you to do inventory forecasting based on your past sales trends. It’s a great method for simple inventory planning when your sales are predictable. This method isn’t suitable for companies on a strong growth trajectory. We’ve got everything you need to know about economic order quantity in another post.
Most businesses experience seasonal changes in demand. A surfing business might sell thousands of boogie boards every month in the summer and very few in the colder months. That business needs more stock on hand to cover demand spikes in the summer. However, it can carry less inventory to reduce carrying costs in the winter. Factor seasonal demand spikes into your inventory planning.
Other types of demand spikes
Let’s imagine that you sell 100 units of a particular SKU every month via your retail sales channels. Once a quarter, a wholesale customer orders 1,000 units. Your average monthly demand is about 434 units. However, 434 units on hand won’t fill the wholesale order. Inventory forecasting helps you understand your sales trends and patterns. That lets you plan to meet both wholesale and retail demand and to have the safety stock you need to cover high-demand months.
Lead time demand
Lead time is the amount of time between when you place a wholesale order and when the products arrive. The amount of inventory you expect to sell between today and your next delivery is lead time demand. This metric, also called lead demand, helps you understand your reorder point.
Of course, your lead time may vary depending on numerous factors. Shortages of raw materials, issues at a factory, design delays with new products, and weather delays in transportation can all disrupt your supply chain and create longer lead times to maintain optimal stock levels. It’s important to factor in both your average lead time and extended lead time. Keep enough safety stock on hand to see you through periods when your lead time is longer than the average lead time.
You reach your reorder point when your stock gets to a point that you need to order now to avoid running out. If your reorder point is zero, it’s time to improve your inventory planning. The reorder point for a fast-selling product will be higher than for one that sells more slowly. The inventory level when you reach your reorder point will be determined by the lead time demand plus your safety stock.
Safety stock is your inventory forecasting cushion. It’s extra stock beyond your regular inventory levels to protect you against the unexpected. Safety stock is a lifesaver if you have a sudden run on a product. It can also come in handy if there’s a breakdown in your supply chain that delays delivery from the factory. Factor in both possibilities when you calculate your safety stock levels.
Types of inventory forecasting
Inventory planning methods range from simple to sophisticated. Both qualitative and quantitative forecasting models may be useful to your business. The type of inventory forecasting you do will be dictated by your inventory management style and the structure of your eCommerce business.
Naïve forecasting is similar to the economic order quantity calculation. You base your predictions for future demand on past consumer demand for the same period. If you’re intimidated by inventory planning, naïve forecasting is a good place to start. It doesn’t account for growth or external factors that might affect your sales. However, it can give you a good baseline from historical data to calculate your average lead time and keep enough inventory on hand to handle most customer demand.
You can choose from a wide range of demand forecasting techniques for your inventory management. Demand forecasting can be based on market research, input from the sales team, economic trend data, sales data, or expert analysis. You might also want to look at different time periods for your inventory forecasting. For example, it could be useful to track sales per day, to determine your average daily volume and which days of the week customers are most likely to place an order. Long term demand forecasting factors in customer demand trends for a longer time period, to help you forecast inventory to meet future sales trends.
Many companies use more than one method for demand forecasting. Comparing the results of different techniques and experimenting with more than one forecast period can help guide your inventory planning.
Inventory forecasting pitfalls
If your inventory forecasting doesn’t match your demand, that doesn’t necessarily mean you did it wrong. Each mistake is another data point to include in your next forecast. Here are some of the reasons that inventory forecasting can fall short.
- The past doesn’t always predict the future. Even if you expect the unexpected, the future is hard to predict. Regulatory changes could wipe out the market for a product. Or a viral video that features one of your items could send demand through the roof. Your safety stock can buffer spikes in demand. A drop-off in sales is more of a challenge. However, with good inventory planning, you won’t be carrying much excess stock. Maintaining ideal inventory levels will reduce your losses, no matter which direction your sales trends go.
- Lead time has an element of uncertainty. Even if your inventory management is a well-oiled machine, outlier events are bound to happen occasionally. Don’t rely solely on your average lead time; build in enough lead time to allow for unforeseen delays.
- Supply chain factors beyond your control. An earthquake could cut power to your factory. Severe weather could delay transport. A global pandemic could close off economic activity in some sectors while boosting it in others. The best inventory management can’t completely protect you from these and other unpredictable factors.
Inventory forecasting tools
Your inventory forecasts can be basic and straightforward. Or you can gather internal sales data, along with and external data, and create a more nuanced model. Here are some of the ways that you can do inventory planning.
Entering your past sales data into a spreadsheet or Google Sheet is a great way to do your first inventory forecast. Make sure you include enough detail to see sales fluctuations by season. Use the patterns that emerge to shape your forecast.
You can plug these numbers into an equation in your spreadsheet to calculate your reorder points for different products. That point might vary during the year as your demand goes up and down.
Lead Time Demand + Safety Stock = Reorder Point
For example, your lead time demand might be 1,000 boogie boards in the summer. Your summer safety stock level is 500 units. So your reorder point is 1,500.
In the winter, your lead time demand might go down to 200 boards and your safety stock to 50. Therefore, in your slow months, your reorder point is 250 units.
If you are comfortable with the math, a spreadsheet can handle even sophisticated inventory forecasting calculations. However, if you’d like a helping hand, demand forecasting software can make it easier to determine reorder points for various products.
Inventory forecasting software
Oracle Demantra and SAP Integrated Business Planning work well for companies of any size. EasyStock and FutureMargin are two popular choices for eCommerce companies.
If you sell on eCommerce platforms, look for an app in the platform marketplaces. There are lots of good choices that will help you make good inventory predictions using data from your platform sales.
Get help from the pros
At the end of the day, there’s no substitute for the human brain. It’s important to crunch the numbers, understand your sales trends, and make evidence-based inventory planning decisions. However, the experienced staff at your 3PL company can be a valuable resource. It’s in the interest of your order fulfillment warehouse to help you maximize turnover and minimize shelf space. At Red Stag Fulfillment, helping you improve your inventory management is part of our service. Give us a call to find out how we can help you.