What Is Inventory Forecasting? Best Practices and Methods

Out of stock.

Those three words can inflict fear or bring joy.

On the one hand, due to consumer demand, your product has sold so well that you have none left. On the other hand, you have no stock left, no more money will be made and you have some potentially unhappy customers.

This is where inventory forecasting comes in. But what exactly is inventory forecasting?

We’ll walk you through the definition and give some practices and methods to help you keep control of your inventory.

Here’s What We’ll Cover:

What Is Inventory Forecasting?

What Are the Benefits of Inventory Forecasting?

The Best Practices For Inventory Forecasting

Key Takeaways

What Is Inventory Forecasting?

Inventory forecasts are used to predict inventory levels for a certain period of time.

It helps to keep a track of your sales and your future demand by looking at historical sales over a certain time period. This means you can accurately manage your purchase orders and adjust your current stock levels.

What Are the Benefits of Inventory Forecasting?

There are a number of benefits of inventory forecasting and management, including:

Reduces Waste

Inventory forecasting can help reveal which items are not selling or items that sell slowly.

This means you can either order less of that stock, stop selling it altogether, or pair it with better-selling products.

This will help reduce waste and will free up warehouse space for better selling products.

Reduces Inventory Holding Fees

Inventory forecasting helps with your overall inventory control. This is because when you only buy what you need, you can reduce your storage space and maximize your warehouse efficiency.

That means that you won’t be paying unnecessary holding fees for space that is being taken up by excess stock.

Less Chance of Selling Out

Selling out of your product is a double-edged sword. Of course, the current demand means that your product is selling well, but if you regularly run out of stock then your customers can run out of patience.

Any time that you are open for business but out of stock is time wasted, and money wasted.

Therefore the ideal situation is to either run out of stock right at the end of your business hours or be left with a small surplus at the end of the day.

The Best Practices For Inventory Forecasting

Here are some great tips and tricks for getting your inventory forecasting in line with your business:

Trust Your Data

Accurate inventory forecasting needs to be backed by data.

Everything from the time taken to receive products from your supply chain to the sales per day needs to be taken into consideration.

This data then needs to be collated and you can work out your supply and demand and avoid having any extra stock.

Collaborate As a Business

For inventory forecasting to be at its best, every aspect of your business needs to be involved.

This includes your operations, finance, marketing and customer-facing departments.

Each of these groups has a unique perspective on your business. So by collaborating as one, you will get a much clearer picture of what is needed.

Set a Reorder Point

A reorder point, or ROP, is a set level at which your stock needs to be replenished. You should never wait until your product is out of stock to reorder.

The ROP is a variable based on your forecasted sales trends and can be adjusted according to the sales season.

The ROP is calculated by multiplying your average daily sales with your lead time and adding that result with your safety stock.

Have Safety Stock

If you have a particular product that is your best seller or constantly sells out, you should keep an extra quantity to prevent stockouts. This will help if you have a spike in demand or your current inventory runs out.

Safety stock is a balance between higher holding costs, and the loss of money from stock outs and lost sales.

Many businesses think of safety stock as having insurance. You might pay a bit more but when it’s needed, you’re glad you have it.

Key Takeaways

Stock management and inventory forecasting can be tricky. It’s a fine balance between having too much stock and too little stock and achieving optimal inventory levels.

That’s why it’s so important to track your data so you can get as accurate a forecast as possible.

With accurate forecasts, you can keep up with customer demand and seasonal trends. This will keep your customers happy and your cash flow flowing.

Are you looking for more business advice on everything from starting a new business to new business practices?

Then check out the FreshBooks resource hub.

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