Inventory Forecasting for Future Demand & Expansion
Whether you’re a brick and mortar retailer or an ecommerce/omnichannel business, your operation is only successful as long as it has the right level of inventory. Simply put, it’s the sale of inventory that puts money in your pocket and, ultimately, keeps the wheels of you business turning.
If you have too little inventory in stock, then you risk experiencing stock outs and missed sales. At worst, if it is a regular occurence, you risk alienating your customers/clients and sending them into the arms of a competitor. But while having more inventory will prevent stock outs, having more than you need will tie up capital that you could be putting to use in other ways: Marketing, development, expansion, etc.
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Proper inventory management requires a balance between these two extremes: You need enough inventory to prevent stock outs, but not so much that you are imprudently tying up your cash or space. Inventory forecasting allows you to strike that balance.
What is inventory forecasting?
Inventory forecasting is the process of making an informed prediction or estimation about the level of inventory that your business will need within a certain window of time. This forecast is important for a number of reasons.
First, because it will inform how much inventory must be purchased within a certain period of time (often 30, 60, 90, or 120 days) in order to meet sales projections.
Beyond this, though, inventory forecasting is critical for facility design, planning, and management. When building a new warehouse, for example, or expanding or optimizing an existing facility, a long-term inventory forecast is necessary to ensure that the facility meets the current needs of your operation as well as any projected future growth.
Simply put, you need to make sure that your facility is the right size—large enough to accommodate growth, but not so large as to be wasteful. You also need to ensure that the facility is planned and built with the right automation technologies in mind to support that inventory, whether that be sorters, automatic storage and retrieval (AS/RS), robotics, or something else entirely.
What goes into an accurate forecast?
Accurately forecasting current and future inventory needs for your operation will ultimately only be possible if you have accurate data to rely upon. It is this data that will inform your strategy and decision. The most important data points to consider include:
1. Sales Velocity
Sales velocity is meant to reflect how fast product is moving off of the shelves, by depicting the average number of sales per SKU or product line per day, week, month, or year. In addition to informing your purchasing, this information is critical to ensuring that any automation technologies (like sorters and AS/RS, etc.) put in place are capable of meeting the requirements of your facility.
2. Historical Trends
This data should reflect two things: How demand has fluctuated in the months leading up to the forecast period, as well as what demand looked like in similar periods (for example, the same 30-day or 60-day window a year ago).
Understanding both of these trends will better allow you to ensure you have the baseline minimum of product, while also presuming appropriate levels of growth.
Most businesses will experience at least some form of seasonality where demand either increases or decreases—sometimes substantially. Seasonality may impact a single SKU or product line, or it may impact an entire business.
In either case, it can have a tremendous impact on both the amount of inventory that is stocked, as well as the equipment and technology put in place to handle it. If you build a warehouse only thinking about average demand, but don’t account for peak demand, then there is a very good chance that you won’t have adequate storage space. Similarly, if technologies are chosen based off of average demand without thinking of peak demand, they may not be able to handle the increased demands of peak season.
What Else to Consider
In addition to the data listed above, it’s important to take into account other strategic or company initiatives that may impact demand. Some of the top considerations include:
Upcoming Promotions (Flash Sales)
If there is a promotion of any kind expected to fall during the timeframe that you are forecasting for, you must take that into account. If not, and you simply plan for typical demand without the addition of a promotion, then you severely increase the risk of a stock out and being unable to meet demand.
Whether it is a flash sale, a buy-one-get-one (BOGO) deal, being featured on the homepage of a website, app, or product category, inclusion in a newsletter or flyer, or something else, no promotion is too small to be considered and factored into the mix.
When looking at data to plan your forecast, aim to understand whether the data you are looking at includes previous promotions that are no longer in effect, which may call for decreased stock and whether you have data from a similar promotion in the past that you can reference to try and gauge the impact of the pending promotion.
Also aim to understand the long-term strategy behind these promotions. If you find that you are regularly conducting flash sales and promotions to get rid of slow-moving inventory and make space in your warehouse for other in demand product, that insight should be taken into account if and when you begin to plan a new facility or expansion of your existing facility.
New Product Launches
If you are in the process of launching a new product or bringing a new SKU or product line into the mix, it can be difficult to forecast demand without true historical data to reference and leverage. That being said, you likely have enough data to form at least a basis of a forecast.
If you’ve launched other products in the past, what did sales look like immediately after the launch? How rapidly did sales increase after the launch (if at all)? Did sales decrease substantially after the initial launch? What did the long-term sales trend for the product look like after the effect of the launch wore off? Similarly, you can and should look at the sales trend of similar items—those in the same brand, line, or product category.
It is also important to understand if this product launch is a one-off or if it is a part of a broader strategy of expansion. If expansion plans include the rapid addition of new SKUs, this absolutely must be taken into account when planning a new facility, as it will impact everything from space requirements to automation to pick/pack strategies and more.
Lead Time (and Other Supply Chain Considerations)
How much product do you currently have on hand? How long will it last you, given current demand? How quickly can you replenish inventory before experiencing a stock out? How much safety stock do you have on hand, and how much are you comfortable keeping on hand into the future? What constraints do your supply chain partners have in terms of meeting an order? Is a key supplier experiencing business difficulties or at risk of being unable to meet your order?
All of these factors are important considerations and should be taken into account, as they will impact your purchasing as well as any planned facility design or expansion.
The Bottom Line
Inventory forecasting is all about making sure that you understand how much product your operation needs now and how much it will need as it grows into the future. At its simplest, an accurate forecast is necessary to ensure that you are purchasing the right levels of inventory.
But beyond this, an accurate long-term forecast is essential for answering questions related to expansion. If a new facility is being planned, how large does it need to be, and what technologies can be put in place to support it? If an existing facility is being expanded or optimized, can these projections be used to justify investing in new equipment or technologies? Can technologies be implemented in a modular way to realize benefits now, as demand grows? And so on. A trusted systems integrator can help you answer these, and other questions.