Problems with inventory do not present themselves at an early stage.
They simply manifest themselves in the form of blocked cash, late deliveries, dissatisfied customers, or warehouses with products that move slowly.
These challenges are not present in most business owners who are not working hard- but because they are not doing proper Inventory Forecasting.
Forecasting inventory has ceased to be a big company strategy. Emerging and expanding businesses today have to smartly forecast demand in order to survive and grow. Today us in this article we are going to dissect the most workable Inventory Forecasting Methods any business owner ought to understand explained in easy language and real life situation. Inventory planning, manufacturing, distribution, or retail: The techniques will assist you to make wiser inventory choices, confidently.
What is Inventory Forecasting?
Forecasting inventory refers to the process of determining the future inventory needs using the past information, demand trend, market scenario, and market intelligence. In simple terms, it aids you in making a decision on what to stock, the quantity to stock and when to stock.
Most companies do not distinguish between forecasting and guesswork. The business of forecasting does not rely on assumptions but informed estimation. Effective inventory forecasting enables organizations to strike a balance between customer demand and organization efficiency. Properly performed, it will make sure that the products are ready when the customers require them and it will not tie up unnecessary cash in out of stock items.
Fundamentally, inventory forecasting unites sales, purchasing, warehousing and finance into a single decision-making process.
The importance of Inventory Forecasting to Business development.
Inventory is cash lying on your shelves. Excessive inventory paralyzes cash flow. Scarcity of inventory will result in lost sales and dissatisfied customers. Inventory forecasting will assist you to remain in the balance figure. Forecasting is even more significant in the case of growing businesses.
Unforeseen expansion is usually a mess, as companies might buy too much at times of expansion or not enough at times of demand. Proper inventory forecasting leads to better planning, ease of operations and improved margins. Those businesses which employ inventory forecasting early enjoy a superior control over the suppliers relationship, production and schedule as well as customer commitments. Forecasting is no longer a choice in competitive markets, but a strategic asset.
Major Factors which influence the accuracy of inventory forecasting.
There is no single factor that is used in inventory forecasting. There are several factors that affect accuracy and knowledge of the factors enhances the quality of decisions made.
Past sales data is a key factor because past demand is usually the predictor of future demand. Nonetheless, statistics are not sufficient.
Seasonal, supplier lead time, promotions, price variations, and market trends should also be put into consideration.
Demand can be greatly affected by external forces like economic status, the activities of competitors and fluctuations of customer preferences. On the inside, low quality data or inconsistent reviewing can decrease the level of accuracy of the forecast. The most effective inventory forecasting is the result of data and business experience, rather than spreadsheet programs.
Inventory Forecasting Techniques All Business owners would want to know.
No one best method of forecasting approaches exists. The correct strategy will be based on the size of your business, the type of products, and the volatility of demand. These are the most widely employed Inventory Forecasting Methods as explained practically below.
History Sales Forecasting.
Historical sales forecasting involves the use of historical sales data to come up with future demand. It presupposes that the sales that will happen in the future will be similar to the past. It is one of the most popular and simple approaches. It is effective in companies where demand is always constant and recurrent consumers.
Regular products are often forecasted using the past to predict future sales through the retailers, wholesalers and distributors. Nonetheless, such an approach will not be effective in cases where the market environment is dynamic or the introduction of new products. To be in line with reality, historical sales forecasting should be revisited on a regular basis.
Trend-Based Forecasting
Trend based forecasting is more concerned with the patterns of demand which are either increasing or decreasing. It does not just consider the previous year figures but it evaluates whether the demand is steadily increasing or decreasing. This is applicable to a business with growth or expansion.
It assists in making modifications in the inventory level ahead of time instead of responding in time. Nevertheless, trends evolve rapidly, particularly in industries that develop rapidly. Trend forecasting is most effective when market awareness and frequent updates of data are involved.
Seasonal Inventory Forecasting.
Seasonal forecasting considers the regular demand trends that are based on certain occasions of the year. Seasonal demand is affected by festivals, holidays, change of weather and annual purchasing cycles. The retail, apparel, FMCG, and consumer goods companies cannot do without this approach.
Seasonal forecasting enables the business to stock to anticipate the peak demand without coming up with surplus inventory once the event is over. One of the most predominant inventory forecasting errors that are committed by expanding businesses is failure to consider seasonality.
Moving Average Forecasting
Moving average forecasting eliminates peaks and declines in the sales in the short run by averaging the sales in a given period of time. It is more predictable in its demand estimate as opposed to the spikes and drops which are sudden.
The approach is applicable to a business with high frequency of change in demand but prefers to have a straightforward forecasting model. Although easy to compute the moving averages are likely to be slow in reflecting the fast changing markets. It is more fitting in short term planning as opposed to long term strategic forecasting.
Inventory Forecasting on Demand.
Demand-based forecasting emphasizes on the real customer demand information instead of historical sales. It involves sales orders, inquiries, point of sale information and customer behavior as used to forecast the future needs. This process brings the inventory planning near the actual demand in the market.
It is more dynamic and precise, particularly where the customer orders of the business vary. Demand-based forecasting must be supplemented by effective data collection systems and frequent monitoring in order to be effective.
Qualitative Forecasting (Expert Judgment)
Qualitative forecasting is based on experience, intuition, and market knowledge as opposed to the use of numerical data. It is mostly applied where limited or no historical data is available. The approach is especially applicable to the new product introduction, niche markets or the industries that are changing fast.
Although the expert judgment will provide some useful information, a pure intuition may cause bias. An amalgamated approach to data-driven forecasting and qualitative understanding is the most successful one.
ABC Analysis Based Forecasting.
ABC analysis divides inventory items into value and impacted ones. A, B and C items represent high value products, moderate, and low value high volume. Forecasting activities are more oriented to A items where the accuracy is the most important consideration.
The approach assists companies to focus resources and attention effectively. ABC-based forecasting is very useful when dealing with a big size of products and less planning ability of the business.
Inventory Forecasting: Unlike in other forecasting types, forecasting based on software is non-probability.
Forecasting is calculated by software programs that involve the use of inventory control or the ERP software. These systems are able to analyze large data sets, patterns and make correct predictions in real time.
Automation eliminates human mistakes and enhances uniformity.
It also facilitates scenario planning, quicker information, and improved coordination of the departments. Inventory forecasting Software is usually the most reliable and sustainable method that can be used to scale businesses.
Automated vs. Manual Inventory Forecasting.
Spreadsheet based manual forecasting is applicable to the initial businesses that have few products and are not facing fluctuating demand. It is flexible, and needs to be disciplined and updated on a routine basis. Manual systems are very prone to errors and time consuming as businesses expand.
Automated forecasting systems are accurate, fast and scaleable. They combine sales, purchasing, and inventory statistics in one perspective. The decision on whether to have manual or automated forecasting will be based on the size of business, complexity and growth objectives.
The most common inventory forecasting errors.
There are numerous issues in the inventory that do not use the tools, but the mistakes. It is common to make mistakes based on the information of the last month and not factor in supplier lead times and over estimate demand on the basis of optimism.
The other significant error is not to review forecasts on a regular basis. Forecasting cannot be a one time affair it must be continually improved. These are some of the mistakes that should be avoided because they can greatly enhance inventory performance with no extra investment.
Selection of an Appropriate Inventory Forecasting.
The correct forecasting technique is based on the business scenario. Constant businesses will be an advantage with the help of historical forecasting, whereas growing businesses require trend and demand-based approaches.
Companies that have seasonal demand should focus on seasonal forecasting, whereas complex operations apply to software-based solutions. One does not have to embrace everything at once.
The way ERP will be useful in enhancing the accuracy of inventory forecasting.
ERP systems consolidate business information and offer real time accessibility to all business activities. They bridge the sales, inventory and purchasing and remove data silos to enhance accuracy of the forecast. ERP allows the business to make forecasts automatically, monitor the real performance, and manipulate plans fast. The result is improved purchasing, lower inventory and higher customer satisfaction. Forecasting is supported by ERP and helps in long-term growth as it allows scalable and decision-driven decision-making based on data.
Best practices in Effective Inventory Forecasting.
Proper forecasting of inventory must be consistent. Make regular forecasts, mix forecasting techniques and compare forecasts to actual outcomes. Keep safety stock not in her heart but in her head. Continue to forecast in line with business interests, not merely requirements. Minor advances in the accuracy of forecasting can result in an enormous increase in cash flow and efficiency.
Conclusions: Inventory Forecasting is a Business Science.
Inventory forecasting is not an action but a business science. It affects the cash flow, customer confidence, and future development. Owners of businesses who take inventory forecasting seriously make sound decisions as a matter of fact. You do not need flawless predictions you need improved predictions than last year. Keep things simple, remain consistent and develop steadily. The process of inventory forecasting is an investment and each step you take will solidify your business.
Frequently Asked Questions (FAQs).
Which inventory forecasting technique is the most useful in the case of small business?
To begin with, small businesses need to begin with historical sales forecasting and slowly transition to the use of demand-based or software-driven techniques as they expand.
What frequency do we expect inventory forecasting to be?
Forecasting is expected to be checked every month at least and more often in case of rapid moving products or seasonal products.
Is it possible to forecast inventory using Excel?
Indeed, the simple use of Excel is acceptable in simple forecasting, but automation is needed with complexity.
What is the role of inventory forecasting in enhancing the cash flow?
It helps in avoiding excessive inventory and unwarranted investment in inventory, which leaves the working capital free.
Are ERP systems inventory forecasting?
Yes, the new ERP solutions have sophisticated inventory forecasting and planning solutions.