What is inventory demand forecasting?
Inventory demand forecasting is typically a responsibility of a supply chain manager or someone who reports to them. Demand planning or demand forecasting is a research-based job function that is used to accurately predict the needed inventory levels for specific products over specific periods of time in the future.
The more accurate a business can be when it comes to calculating what products they will have and when they will have them combined with determining what products will be needed and when they will be needed, the more efficient the business can be.
Efficient and accurate inventory demand forecasting can ensure that a business always has enough stock to fill customer orders without tying up too much capital in inventory.
When it comes to inventory demand forecasting, there are a number of metrics that a supply management team needs to keep track of. Here is a quick breakdown of some of those most vital metrics used in inventory demand forecasting.
- Sales velocity versus average sales: The rate of sales without counting the days that a product was out of stock. To calculate sales velocity, you need to take 365 days and divide it by the number of days an item was in stock and then multiply that by 30 days.
- Lead time: The time it takes for a business to receive a product after ordering it from a supplier.
- Economic order quantity: The most cost-efficient quantity of a product that a business can order.
- Reorder point: The reorder point is a metric that takes into account the number of units sold per day, the lead time, and the safety stock level. This metric helps a business decide when to make a new order from a supplier.
- Inventory turnover: The number of occurrences where a business has sold and replenished a product.
- Average inventory: The average number of a product you have during a given period.
- Safety stock: The amount of a product you need in stock in order to account for minor surges in customer demand.
With these metrics, a supply chain manager and their team can ideally calculate the most accurate and efficient inventory demand forecast.
Types of inventory forecasting
There are four commonly used types of inventory forecasting used by companies. The four types include trend, graphical, qualitative, and quantitative forecasting. Here are each of these types of inventory forecasting in a bit more detail.
- Trend forecasting: Trend forecasting is a data set that tracks changes in demand for a product over time. An analyst looking at this data may be able to identify possible patterns using past sales and realized growth. They can also look at specific customers or groups of customers and predict how they may purchase in the future. Based on all of this information, new marketing techniques and special offers can be created.
- Graphical forecasting: The same data that is collected for trend forecasting can be conveyed using graphs to show fluctuations in sales over time.
- Qualitative forecasting: Qualitative forecasting uses data from customers that is collected through market research and focus groups to forecast potential demand.
- Quantitative forecasting: Quantitative forecasting uses past data to create time-series forecastings. The more data that is available, the more accurate the forecast can be.
How inventory demand forecasting may help your business
Accurate inventory demand forecasting is essential for any business. The more accurate and efficient the forecasting, the more benefits a business can enjoy. Here are some of the most ideal benefits a company can expect if it can accurately forecast future demand.
- Maintain accurate stock levels: Accurate stock levels are important both ways. If you are always out of stock or short on a particular product, back-ordering customer orders or needing to cancel orders can give your company a bad reputation and cost you money. Missed sales due to insufficient stock are something you want to avoid at all costs. On the other hand, having too much stock is a problem as well. If you have too much product in inventory, that is money sitting idle that could be put to other uses as working capital. Additionally, warehouse space is not cheap. Paying to store a product that sits for long periods of time is not a wise use of capital.
- Save time: If you have accurate inventory demand forecasting, many processes such as reordering and updating can be automated rather than entered in manually. These types of automated processes are an excellent way to save time and resources.
- Maintain a healthy cash flow: To piggyback off of how accurate inventory demand forecasting can be beneficial, having accurate inventory demand forecasting can help a business maintain a healthy cash flow. Inventory is just the physical embodiment of money. Keep a constant flow of goods receiving and shipping to have a good amount of working capital on hand at all times.
- Quicker reaction time to changes: Sudden changes in the supply chain can more easily be taken in stride if the inventory demand forecasting is accurate and all of the necessary metrics are well-maintained.
Best inventory demand forecasting techniques
Supply chain management teams have various techniques they like to use to create the most accurate inventory demand forecasts that they can. Here are a few of the best techniques that are used today.
Trends can be summarized as peaks and valleys of demand that a businesses experience for a specific product through the product cycle. It’s important to be on top of those trends for accurate forecasting.
Adjust forecasting for seasonality
Seasonal demand exists for every type of product, however, it should be kept separate from base demand. Seasonal demand takes into account the holiday shopping season, weather patterns, and other factors that may create a surge in demand for a specific product. It is important to be aware of seasonality for each different product in inventory.
Use inventory demand types
Different products tend to have different demand types. Make sure you are aware of those demand types. Some products are always in demand but the level of demand varies greatly, some are always in demand but at consistent levels, and some have clearly defined peak demand times and times when there is little to no demand.
Decide on future forecast period
The forecast period for a specific product depends on the volatility of demand. If demand for a certain product seems to be sporadic, then forecasting will need to be done on a more frequent basis. If demand for a product is slow yet consistent, then forecasting periods can be done for much longer periods into the future.
Consider qualitative inputs
Qualitative inputs include sales promotions, competitor activity, and future events that could affect future demand. These factors need to be considered as well, however, they can be treated similarly to seasonal demand where it is calculated separately from base demand.
Using a demand forecasting software
Demand forecasting software can be especially useful if your business is complex with multiple lines of products all with varying degrees of demand. There are enterprise resource planning systems, warehouse management systems, e-Commerce tools, and inventory optimization software that all can help a business create accurate forecasts.
How Kickfurther can help
Accurately forecasting inventory can uncover over and under stocking issues. As you work to perfect inventory forecasting you may discover a need to stock more inventory. While finances should not stand in the way of stocking plenty of inventory, the reality is they do. Luckily, Kickfurther can help by connecting you to affordable inventory funding.
Kickfurther is the world’s first online inventory funding platform that enables small businesses to access funds that they are unable to acquire through traditional sources. For companies that sell physical products or non-perishable consumables and have revenue between $150k to $15mm over the last 12 months, Kickfurther can help. We connect brands to a community of backers who help fund inventory on consignment and give brands flexibility to pay that back as they receive cash from sales.
Kickfurther can help startups and small businesses fund millions of dollars of inventory at costs up to 30% lower cost than the competition. With more than $100 million in inventory funded to date, Kickfurther can help you get funded within a day or even minutes to hours.
Interested in getting funded at Kickfurther? Here are 3 easy steps to get started:
#1. Create a free business account
#2. Complete the online application
#3. Review a potential deal with one of our account reps & get funded in minutes