Without a proven strategy in place to forecast future inventory needs, many retailers could take a big hit if they order the wrong amount of a particular product. It’s estimated that U.S. retailers are currently holding $1.43 in inventory for every $1.00 in sales that they make. This means that one incorrect guess could be a major blow to online retailers, who have to pay to store these goods. The best solution to avoid this kind of catastrophe is inventory forecasting. eCommerce inventory forecasting gives online brands the ability to save costs on warehousing management and the cost of unsold stock, while still allowing them to meet demand. Stockouts can impede sales and hurt your reputation as a reliable online seller. Inventory forecasting ensures you’re ready for anything. Here’s what you should know about inventory forecasting methods, benefits, challenges, and how to be sure you always have exactly what you need; nothing more or less.
What is Inventory Forecasting?Inventory forecasting is an important function in the world of eCommerce, direct-to-consumer business models, and online retail. It’s used to determine necessary inventory levels in the future based on sales projections. For inventory forecasting to be successful and accurate there must be certain boundaries in place. These boundaries include:
- Forecast period: The set amount of time to establish forecast quantity
- Trend: Increases and decreases in demand over a set time period to more easily and accurately project future sales
- Base demand: The starting point for an inventory forecast; the current demand
Why It Matters: The Benefits of Inventory ForecastingNo one wants to run out of product and make their customers wait. Likewise, it’s just as undesirable to pay for excess warehouse space when goods aren’t selling, which—depending on your industry—can also result in lost or wasted product. What are the perks associated with inventory forecasting? Avoid Stockouts Why is inventory forecasting so important? For starters, inventory forecasting minimizes stockouts that result in lost sales revenue. Using the information available in inventory forecasting, eCommerce retailers know exactly when to restock and how much of each product to order. Thirty-four percent of businesses struggle with overselling product. These stockouts can be a major detriment to a business’s success. In fact, according to Supply Chain Dive, out-of-stocks are more costly to an eCommerce brand than lost sales. Limit Inventory Storage Costs Inventory forecasting is an important tool in inventory management. Because your brand is only buying the goods you’re likely to need, you only have to pay to stock those products, as opposed to ordering too much. This limits the amount of unused storage space as well as the costs that accompany this unwanted space. Keep Wasted Product to a Minimum Another valuable part of inventory management is that brands gain key insights into which items aren’t selling and which items are selling slowly. This gives online retailers the opportunity to repurpose or bundle these products with products that have a better track record. The result is that brands can free up warehouse space and boost incoming revenue.
Inventory Forecasting MethodsThere are two ways to approach inventory forecasting—quantitative and qualitative inventory forecasting—and each can be used on its own to predict future demand and sales, but they can also be used in tandem to gain a full picture of an eCommerce store’s future needs. Here’s what you should know about each:
- Quantitative forecasting is a mathematical model to predict sales using existing data. A year or more of sales data will help online retailers compile more accurate predictions about inventory demand comparing highs and lows, peaks, and seasonal trends.
- Qualitative forecasting is an economic model that focuses on predictions surrounding the economy, market, and potential demand. This forecasting model relies not on internal past data, but instead on the external economic climate, and would include factors like emerging technologies, availability changes, pricing changes, public perception, product lifecycle, and potential market saturation.
The Challenges of In-House Inventory ForecastingSome of the challenges associated with attempting to manage inventory forecasting in-house can lead to major issues if left unchecked. With several approaches to predict demand and lots of variables in play, improper inventory forecasting leaves a lot to chance, with plenty of opportunity for error. What issues can arise when trying to handle inventory forecasting in-house?
- It can be hard to devote the proper amount of time and attention to inventory forecasting when it’s another item added to your to-do list. It’s costly to hire someone to manage this for you, but if you try to handle it all yourself, you’ll end up spread too thin.
- Retailers may struggle to integrate data-driven solutions into their existing enterprise resource planning system and/or customer resource management tools. This will either lead to unnecessary duplication of data and technological bottlenecks. Others find that it creates a lack of actionable insights into unstructured data sets. With challenges in integration and data analytics, it’s hard for retailers to improve their business operations on their own.
- Without a proven strategy to guide you to a focused approach to inventory management, retailers have to make decisions for the companies as a whole instead of targeting inventory management to specific regions. A more methodical approach is important to make data-driven, focused decisions.