Data isn't just an android from Star Trek, it's a valuable tool for inventory forecasting.
Inventory forecasting can help you prepare for changes in consumer demand, uncover new opportunities for inventory, and increase your profits. That's why it's important to understand how to calculate ending inventory. It can also be daunting when developing an inventory manager salary and job description.
Read on to discover how inventory forecasting works, the elements needed for it, and the tools you can use to do it.
How to Do Inventory Forecasting
Inventory forecasting is a method of inventory control used to predict future inventory levels needed to meet demand. This is accomplished by looking at historical data and combining it with future assumptions on demand cycles and sales trends for each SKU number. Software and spreadsheets are used to calculate the reorder point formula, inventory days formula, determine what to keep a safety stock of, or if something should be discontinued.
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Collecting data is the most important part of inventory forecasting. This requires a strong inventory management program. Sales trends, stock issues, and dead stock (see dead stock meaning) are just a few of the things that can be uncovered by taking regular inventory.
How to Forecast Inventory Levels
To forecast inventory levels, you must first take inventory at least twice. These can be physical inventories, an inventory cycle count, or the use of a perpetual inventory program. From there, you can determine what products are selling well and if they are nearing their reorder point. This lets you predict future sales trends based on historical sales.
You can also use ABC inventory analysis to organize the products by value and establish goals for each. This will let you invest more into purchasing, marketing, and selling the most in-demand products.
Each new inventory taken will provide further insight into inventory trends. You can use any shifts in sales or stock levels to make more informed forecasts.
Inventory Forecasting Elements
There are many moving parts when using inventory forecasting. Here are four major elements you need to consider:
- Accuracy of demand forecasting. When forecasting inventory levels, you need enough data regarding consumer demand. This includes product sales trends, inventory levels, and pending orders. Otherwise, your forecasts will be less accurate and you won't order the optimal economic order quantity. This means you could end up with excess inventory or too little inventory.
- Lead time forecasting. Understanding how long each product takes to arrive in your inventory is key for forecasting. If not calculated correctly you may end up with a backorder--or several--plus unhappy customers.
- Reorder cycle optimization. Standing inventory levels, optimal reorder points, and the frequency of order placement all affect your ability to plan for future order fulfillment.
- Special order consideration. If demand does increase more than forecasted, you need to have a plan for special orders. This involves coordinating with your suppliers and manufacturers to meet your needs at a moment's notice. This is especially true if your suppliers require a minimum order quantity (MOQ).
How to Forecast in Excel for Inventory
If you don't have software as a part of you inventory management process with integrated forecasting, your next best option is to use an Excel spreadsheet. This sheet can vary by company, but it mainly needs to track inventory levels, costs, lead time (see lead time definition), and discontinuation status.
To help, we've provided a template for your use below.
Inventory Forecast Template
Creating an inventory forecast template for your business would take your time and energy away from making money. That’s why we put together a simple inventory forecast template spreadsheet. Just download the inventory forecast template, pull out our sample data to add in your own, and begin forecasting your inventory!
With this sheet, you can track your inventory value, reorder points, and amount in storage. This will let you determine the best ways to optimize your inventory usage.
Benefits of Inventory Forecasting
If you’re researching how to forecast inventory, you might be curious to know more about the advantages of inventory forecasting. There are significant benefits for businesses that use inventory forecasting as part of their stock management process. Here are the main pros.
- Thanks to inventory forecasting, businesses can reduce stockouts and lost sales due to them.
- Reduction of excess inventory and the increased storage costs of overstocking are other benefits of inventory demand forecasting.
- Companies that forecast inventory efficiently have improved cash flows due to ordering only items that are needed and when they are needed. That way, businesses don’t spend cash on slow-moving stock.
- Better coordination with suppliers is another benefit of doing inventory forecasting. It can also prevent supply chain disruptions and the need for emergency shipments with higher transportation costs.
- Better planning and budgeting as a result of inventory forecasting helps with sales planning and financial forecasting. It also improves the data-driven decision-making process.
- Although inventory forecasting doesn’t lead to dramatic benefits for small businesses, large companies can increase their profit margins and get a competitive advantage over other businesses.
Forecasting Analysis to Optimize Inventory
If you don't use forecasting analysis, you don't have the optimum inventory. That's because you're wasting all of the valuable data that comes with inventory tracking and predicting inventory trends. Luckily, analyzing those trends to forecast future sales can be done by most businesses willing to commit to the process.
Best Way to Forecast Inventory
There are many ways any business looking to forecast for inventory management and control can achieve their goals.
Here are three best practices to get you started:
- Consistently track inventory. You can't forecast inventory if you don't know what you own. Tracking inventory levels not only informs you that you need to reorder goods, but it provides insight into inventory turnover rates and seasonal demand trends. Turnover is calculated using the inventory turnover formula.
- Involve key players. Many departments are involved in the movement of inventory. Include at least one person from each when making planning decisions and you'll be surprised at some of the insights different people bring.
- Use inventory management software. Inventory forecasting can be done manually, but it's difficult. This is especially true if you have a very large inventory. Software can automate much of the process and give you immediate access to pertinent data.
Inventory Forecasting Software
Inventory forecasting is made much simpler and more precise by using inventory forecasting software. Most perpetual inventory management software has this functionality built in, but there are also stand-alone options.
If you choose to go this route, here are the most important features to look for:
- Integration into existing databases. You should already be tracking many pertinent aspects of your inventory. You need to make sure any inventory software you purchase can easily pull data from your systems. If not, you'll lose all that valuable historic data and have to start anew.
- Intuitive user interface. A piece of software that is too unwieldy is just an expensive waste. Test out any software you'd like to purchase in advance so you can see how easy it is to grasp.
- Quick implementation. The initial setup of any inventory management system is time-consuming. Make sure it can be done within a reasonable time frame so you can get to making informed decisions as quickly as possible.
- Aligns with business goals and processes. Investing in forecasting software only makes sense if it fits in with your larger business goals. If not, you're just throwing money away. You also need to be able to dedicate resources to its implementation and use.
Did You See This Coming?
Inventory forecasting is a valuable stock control tool that lets you optimize your inventory, increase sales, and make great use of a wholesale marketplace (if it applies to your business). You can match your inventory to demand cycles and ensure your customers' needs are always met. Use our inventory forecasting spreadsheet or invest in an inventory management program and watch your stock value grow. You should also make sure to perform and inventory audit to determine any other areas of trouble. It's an important part of our inventory control guide.
Frequently Asked Questions About Inventory Forecasting
If there’s one skill to master early on in a physical products business, it’s inventory forecasting. Accurately predicting how much inventory you’ll need and when is one difference between a profitable business and a failed one. To learn more about it, check out these commonly asked questions below:
What Data Is Needed to Do Inventory Forecasting?
Forecasting demand and inventory is only possible when there’s reliable and accurate historical data. The main type of operational data used to forecast inventory is sales per product over time. Seasonality and trends should also be taken into account when forecasting inventory. Metrics such as lead time, returns, and inventory turnover are also used to effectively forecast demand and sales projections. It’s important to consider supplier-related data like fill rates and order accuracy. Even if you have excellent inventory forecasting, the poor performance of suppliers can hurt your business. Economic indicators, competitor activity, and market trends are also variables that are included in precise inventory demand forecasting models. They show the market sentiment and anticipated demand shifts beyond the company.
How do you calculate projected inventory?
Calculating projected inventory is easy with the projected inventory level formula. Here it is:
End of day inventory + currently inbound inventory - currently outbound inventory = projected inventory level
For example:
567 end of day inventory + 2,000 currently inbound inventory - 943 currently outbound inventory = 1,624 projected inventory level
What are the demand forecasting techniques?
There are four ways to conduct demand forecasting: the Delphi method, predictive analysis, conjoint analysis, and intent surveying.
The Delphi method posits that input from a group of professionals is better than input from a single professional. A group of experts will offer their insights anonymously and the client or business will assess the summarized information.
Predictive analysis uses historical and current data to assess why people buy products. By understanding the intent behind purchases, it’s easier to predict what will sell, how much, and when.
Conjoint analysis is asking customers about their favorite aspects of current and/or potential products. By further understanding what customers love most about a product line, you can make products better or design new ones.
Finally, customer intent surveys are used to ask buyers what they’re planning on purchasing in the future. Data like this helps a company see which products are relevant vs those quickly becoming obsolete.