3 Best Practices to Remove Uncertainty in Inventory Forecasting

Maintain healthy inventory levels. Keep the inventory cycle running. Stay away from dead stock.

This seems to be the basic objectives that every business owner having inventory in their books seems to be trying to achieve.

Let’s face it. Maintaining inventory is one hell of a task.

Especially with distribution centres increasing in numbers, orders flowing in from multiple channels and logistics tightening the grip for cost-efficiency, keeping a pulse on inventory is not for the faint hearted. To maintain stock levels and to ensure that the business does not run into a stock-out nightmare, it is essential to use a cloud based inventory management system.

However, even with an inventory management system estimating how much stock you will need for the future is a tricky task. It is here that inventory forecasting comes into play. Inventory + Forecasting might sound like too much of mathematical mayhem. But, the truth is, it is all about common sense and a little bit of business sense blended in equal proportions to arrive at sensible decisions – decisions which will turn around the profitability of a business.

Inventory Forecasting helps a business to calculate safety stock accurately and to determine with accuracy common inventory metrics like reorder levels, minimum & maximum levels which keeps the business investment in inventory at optimum levels. Never too high, never too less, just the right amount needed to run operations smoothly.

The Big Number Question: How Inventory Forecasting is done?

Inventory Forecasting can be done by scientific methods. In fact, there are mathematical methods like scenario writing, Delphi technique, subjective approach, time-series forecasting, etc. all of which do the same thing but with complexity.

As a business owner with so many priorities running due all the time, meddling with mathematical formulae is the last thing you would want on your plate. But, you cannot turn a blind eye to inventory forecasting either.

A safe way out will be to follow the best practices that never fail to achieve results. Some best practices in inventory forecasting that are known to yield results are as below:

#1 Observe the trends

Trends have a way of telling what is working out in the market and what is not. For instance, in the present, everybody wants slim and ergonomic fitness trackers, the demand for metal chunky watches have dipped a bit.

So, it makes sense to pile up more stocks of fitness trackers than steel watches. The key point to note is that, the business should plan not to spend too much money on low-value SKUs but should focus on adding more inventory of products that are selling well.

#2 Numbers don’t lie

On the onset, inventory forecasting is an estimate. It is not accurate to the last decimal. There is always an approximation involved which business owners must consider before planning their inventory.

However, statistical methods do help in reducing the extent of uncertainty involved in inventory forecasting. Use of software tools and drawing averages from their reports can help point at where the inventory levels are heading. Deviation from standard averages can be used to upscale or downsize purchases for specific SKUs.

For instance, like in the case of fitness trackers, the purchase quantity for fitness trackers can be increased while the purchase quantity for watches can be reduced to even out the demand fluctuation.

#3 Seasons have characteristics

One major mistake that most managers make when it comes to forecasting inventory, is treating the function at par with organizational planning. Unlike organizational planning, inventory forecasting should include consideration for seasonal changes.

Demand for certain products will inflate and deflate with season. Inventory planning for such products should be done based on historical figures of seasonal sales and their deviations. The targeted sales figures should also be drawn side-by-side to arrive at a nominal purchase quantity.

Inventory forecasting is a must-have for businesses of all scales and sizes. The detailing of the process will vary with the business needs. Bigger and expansive the operations, more fragmented will be the inventory forecast. The period of inventory forecast will also differ based on the business volumes.

Time to prepare your periodic inventory forecast? Bear in mind what we told you to be more certain about your figures.

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