Inventory Forecasting: A Guide to Accuracy and Getting Started
There’s nothing better than having the items your customers want to buy in stock and ready to go. On the flip side, having to turn customers away because you’ve run out of an item is every retailer’s nightmare.
It all comes down to the accuracy of your inventory forecasting. Forecasting is a balancing act that isn’t always easy. Too many items sitting on your shelves means you likely have too much capital tied up in inventory. Too few, and you’re basically sending customers to your competition.
If you feel like inventory forecasting isn’t your strong suit, you’re not alone. Seven in ten retailers said inaccurate forecasting is “a constant issue,” resulting in either too much or too little inventory to meet demand. Eighty-seven percent consider inaccurate inventory a bigger revenue loss problem than theft.
What is inventory forecasting?
Inventory forecasting is the calculating of inventory needed to meet customer demand. While that sounds simple, it takes a blend of quantitative data and intuition that no retailer gets right 100 percent of the time. After all, inventory forecasting is basically using existing data to predict future events.
Estimating future inventory needs requires data and information about past sales, planned promotional strategies, and external factors, such as seasonality, competition, and trends.
Inventory forecasting done well means you’re not buying more inventory than you need, you’re able to satisfy customer demand, and you’re efficiently managing your supply chain. Over time, poor inventory forecasting can reduce your margins and damage customer satisfaction and loyalty.
3 steps toward better inventory forecasting
Here are some insights into how you can turn inventory forecasting into a competitive advantage for your business.
1. Look back to forecast forward.
Before you can accurately estimate how much inventory to order, you have to get familiar with your store’s inventory history. In retail, one of the most important indicators of future inventory needs is analysis of past sales and inventory data.
Your point of sale system (POS) should provide standard inventory management reports, along with the ability to customize reports to fit your business. Start by regularly tracking the best and worst selling items in your inventory. By monitoring regular reports across different seasons and sales cycles, you’ll gain insights into buying patterns as well as the ability to spot early indicators that either customer or supplier behaviors have changed.
Inventory turnover is an essential metric to track. Your inventory turnover rate tells you how many times a particular SKU is sold and replaced during a defined time period, such as a month or a year. Inventory turnover – also known as stock turn – is calculated by dividing the cost of items sold by the average inventory. For most retailers, a higher inventory turnover rate means you’re selling items without overstocking the amount you have in inventory.
2. Think end-to-end.
Pinpointing an item’s reorder point is a fundamental element of successful inventory forecasting. It’s not just about monitoring in-stock amounts. You’ll also want to add in the manufacturer’s timeline for fulfilling your inventory orders as well as any turnaround time on your end when you receive new stock.
You should also build in a cushion to cover an unexpected surge in customer demand or delays in production on the part of the manufacturer. Once you identify these numbers, it’s easy to calculate a reorder point. Add the number of days it takes to receive an item after placing the order to the number of days it takes you to receive an item and get it on the shelves ready for customers to buy.
Then, add on the number of cushion days you’re allowing for a particular item. Multiply the total number of days you just added up by the average inventory demand per day to determine your reorder point. Knowing a reorder point for each SKU enables you to trigger alerts to initiate new purchase orders and prevent out-of-stock situations.
Related: The Secret to Retail Success? 3 Must-Have Inventory Management Capabilities
3. Take note of trends and unexpected drivers.
Historical data can help you identify some buying trends that will impact inventory forecasting. But you also need to look externally to factor in the impact of seasonality, market trends, and even the weather.
Almost all retail businesses have some degree of seasonality. A clothing store needs to account for different buyer needs heading into summer, or a craft or hobby store needs to ramp up certain items ahead of holidays like Halloween or Christmas. In addition, seasonality doesn’t affect every item in inventory in the same way. You’ll want to build flexibility into your forecasting so you can adjust your purchasing and reordering decisions accordingly.
Effective inventory forecasting mixes the historical inventory data with qualitative expectations about seasonality. Similarly, you’ll want to keep up with market trends and competitive factors with the potential to increase customer demand or shift it away from historical patterns.
While you won’t be able to predict the unexpected, you should make note of significant events that drive different buying behaviors. For example, an unusually cold winter or a social media shout-out by a celebrity about a product will drive purchasing spikes you’ll want to account for as you use the data to inform future decisions.
Optimizing your inventory forecasting is part art and part science. Good forecasting relies on being able to access and use data easily. POSIM can help by integrating your inventory data across multiple store locations, e-commerce, and mobile. Along with comprehensive point-of-sale capabilities, POSIM provides extensive inventory management features designed to give retailers access to a range of built-in reports as well as the ability to customize them using filters and grouping. In addition, POSIM offers a powerful define-a-report option to help users build custom reports through an easy-to-use interface. Explore what’s possible with POSIM. Contact us for a demo.