What Is Inventory Forecasting?

Inventory forecasting is a method used to predict inventory levels for a future time
period. It also helps keep track of sales and demand so you can better manage your
purchase orders. It is a great inventory management tool that can increase your
company’s revenue and decrease unnecessary costs.

What Are the Types of Inventory Forecasting?

Let’s take a look at the main forecasting techniques, which fall into four main categories:
Trend forecasting
● Graphical forecasting
● Qualitative forecasting
● Quantitative Forecasting

Trend Forecasting

Trend forecasting is a method that uses past sales or market growth data to determine
possible sales trends in the future. The upward or downward trend is calculated for the
particular product and the demand is forecasted based on the result. Trend data helps
determine future sales and modify your inventory management strategy accordingly.

Here’s an example of trend forecasting:

A small business selling umbrellas has been running for eight years. Over the years, the business has been profitable. However, there are no plans to expand yet. Their historical data over the last three years shows that October, November, and December are their top-performing months, while June, July, and August are the least successful.
Using this data, they can develop a trend projection that indicates when they should
place their orders for supplies and products. This information can also enable them to
set up a marketing campaign during their slowest months next year that would boost
sales.

Graphical Forecasting

This inventory forecasting method interprets past data using a graphical representation.
It can be a pie chart, a line graph, or a histogram.
Consider examining data points that relate to the supply chain and client demand over a
projection period. Numerical data by themselves are boring and confusing. The
decision-making body will find the images more useful and accessible.
You can generate a comparable visual representation of the data between those periods
by creating a graphical forecast. You will have a clearer understanding of the overall
data trend as a result. It will be simpler and more comprehensive to develop inventory
management methods that way

Qualitative forecasting

This model uses fewer data from the merchant’s order history and instead relies on
external factors like market intelligence, environmental forces, economic demand, and
other macro-level shifts (e.g., buying behavior shifts from pre- to post-pandemic,
inflation, etc.).

Quantitative Forecasting

Considered more accurate than qualitative research alone, quantitative forecasting uses
past numerical data. The more data a company has, the more precise the forecast
usually is. One example of quantitative forecasting is time-series forecasting, which
uses temporal quantitative data to make a model predict future trends.

How to Choose the Right Forecasting Method?

In 2019, a case study proved that a combination of forecasting methods creates better
results.
Combining inventory forecasting models can provide more comprehensive data to
predict future sales and estimate the amount of inventory needed to meet demand
without the risk of product loss or spoilage.
You can adapt to unexpected changes in consumer demand by using a mix of different
methods.

How Can Businesses Benefit From Inventory Forecasting?

There are many benefits to forecasting inventory. Ranging from improved customer
satisfaction to cost reduction, the following are the most common benefits of producing
demand projections.

● Lower inventory costs

Inventory can be kept in large quantities in a warehouse and left to gather dust, but
that’s typically not a profitable business strategy. You won’t be required to buy inventory
that you won’t need for a specific time period if you have data-driven projections of how
much inventory you will need. This implies that you can improve inventory accounting,
help with cash flow, and even free up money for other business operations.

● More efficient production cycle

Accurate inventory forecasting will ensure consumers are able to receive their products
without supply chain delays. This increases customer retention and satisfaction

● More sales from fewer out-of-stock items

Stock-outs and backorders won’t be an issue if you have enough inventory on hand
because you can fill every order as soon as it is placed and give them the delivery they
were promised.

● Data-driven sales strategies

Planning for marketing, pricing, and promotions can benefit greatly from inventory
forecasting. By knowing which products are high sellers and which are in need of a
boost, businesses can structure their sales strategies around promoting slower-moving
products to prevent them from becoming dead stock.

Some last words

In conclusion, inventory forecasting enables one to make better choices on which prices
to adjust and when, which products to advertise, and which promotional strategies to
use in order to achieve goals. When compared to a straightforward sales estimate, the
advantages are much more profound and effective. You may improve your purchasing,
allocating, and replenishing decisions by combining forecasts. In turn, you will reduce
the cost of over-stocks and minimize the frequency of out-of-stocks.