Inventory forecasting is a considerable aspect of any business that deals with selling physical goods or provides customer service because between forecasting and inventory management there is a direct relationship. The major goal of inventory forecasting is maximizing the number of orders that can be fulfilled while minimizing the number of items in stock.
Inventory forecasting helps predict future stock levels by analyzing the past sales of each item from inventory. The first look, the idea is very easy: to supply the number of goods that will satisfy the demand. However, it is difficult and even impossible to define the accurate number of items needed in the future.
Sales forecasting helps to make decisions about resource allocation. Accurate forecasts drive better resource allocation and, as a result, help to improve financial performance by decreasing the amount of inventory that a company must carry.
The past sales data allows companies to define the inventory level (for each item) they should support in the storage to satisfy customers' needs. Therefore, forecast accuracy is one of the key aspects enabling the company's growth and success. Along with forecasting, inventory management is a comprehensive and very important process that influences the financial situation of the company and the business whole. Moreover, inventory management is the most important arm of the supply chain because of its overall effect on company profitability. The inventory software system to forecast customer demand can help to increase the ability to estimate future sales and, as a result, can help to reduce stock shortages or overstocks.
1. Lead time – the time between order placement and delivery of ordered goods from a vendor.
2. Safety stock – a level of extra stock maintained to mitigate the risk of stockouts due to uncertainties in demand or unexpected breaking down of the supply chain.
3. Economic order quantity – the order quantity minimizing the total costs that include:
a. Purchase cost – costs of ordered goods.
b. Ordering cost – expenses met with creating and processing orders to a vendor.
c. Holding cost – expenses associated with storing unsold inventory.
4. Reorder point – The minimum inventory level when the item must be reordered if the stock falls to this quantity.
5. Reorder quantity – the number of item units that will provide the best balance between the many factors, including:
a. Quantity discount – decreased cost per unit of goods or materials purchased in greater numbers.
b. Freight – the charge paid for the transportation of goods by land, air, or sea.
c. Storage costs – expenses associated with storing goods or materials.
d. Working capital requirements - the funds required to be kept on hand by the company to pay its debt obligations and other business-related expenses.
6. Base demand – the current demand.
7. Forecast period – a period for which a forecast is prepared.
8. Trend – increasing or decreasing customer demand over the forecasting period.
The starting point for forecasting is the current customer demand. Identifying the tendency of increasing or decreasing customer demand over a certain period makes it easier to project future sales. The balance of optimal safety stock and strategic inventory investments is an important component of efficient inventory planning. The tradeoff between inventory cost and provided service is the main goal of inventory optimization. Demand planning and forecasting helps to reach better returns on invested capital and provide better service to customers.
Businesses are in a continual state of motion whose pace has accelerated in recent years. Today, forecasting sales and inventory management are a foundation upon which companies plan their business activity regarding the market and revenue projections.
The forecasting process's accuracy can cardinally influence your business profitability in a good sense. Predicting future demand is a critical element regarding sales assumptions, costs, and profits. At the same time, predicting future sales is the starting point of business planning, including defining the needed inventory level and purchasing.
To know what level of inventory should be in stock, you need to start with the forecast of sales for the coming one, three, six, or twelve months based on past seasonality and velocity of product sales.
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