Tammy of Tammy’s Terrific Towels saw orders pouring in for her big Black Friday sale. She was over the moon and decided to celebrate by booking a trip. Then Tammy got a notification that would derail her vacation plans: The orders couldn’t be fulfilled — her towels had gone out-of-stock.
Now, instead of an amazingly profitable and relaxing weekend, Tammy was dealing with angry customers criticizing her brand online, issuing refunds, spending a lot of money to make it right, and losing a lot of potential lifelong customers.
How could this happen? Why did she not have enough product to fulfill the orders?
Two words: inventory forecasting — or lack thereof. Examples like this happen to online store owners every day, but it’s not always a catastrophic event like what happened to Tammy. Instead, poor inventory forecasting can have a slow, less obvious impact on your business, silently chipping away at your margins, reputation, and customer satisfaction levels.
What is inventory forecasting?
Inventory forecasting is the process of calculating the inventory needed to fulfill future customer orders based on how much product you predict you will sell over a specific period of time. These estimates take historic sales data, planned promotions, and external forces into account to be as accurate as possible.
The top 4 benefits of accurate inventory forecasting
Now that you understand the downside and potential negative impact of not having a system in place for proper inventory forecasting, here is the upside of getting it right.
1. Less inventory needed on hand
You can store inventory in bulk in a warehouse and have it sit there collecting dust, but that’s not usually a profitable way of doing business. By having data-driven predictions on how much inventory you will need, you won’t have to purchase inventory that you don’t need for a given time period. This means you can improve inventory accounting, help your cash flow, and even free up funds for other areas of the business.
“With ShipBob, we have access to live inventory management, knowing exactly how many units we have in each fulfillment center. This not only helps with our overall process in managing and making sure our inventory levels are balanced but also for tax purposes at the end of the year.”
Matt Dryfhout, Founder & CEO of BAKblade
2. More sales from fewer out-of-stock items
If you have enough inventory on hand, you don’t have to worry about stockouts or back orders — you can fulfill each order as soon as it’s placed and provide customers the delivery they were promised. Aligning with marketing on upcoming campaigns (even at the channel-level) is critical for inventory forecasting.
Additionally, the customer experience remains a positive one when shoppers find what they’re looking for online and don’t encounter an “out-of-stock” message just to leave your store and shop elsewhere. For every customer you lose by not having what they need when they need it, you risk losing their future business as well.
3. Less manual labor
Accurate inventory forecasting saves labor and warehousing costs because you are better prepared to handle changes in demand and can reduce some manual work. Inventory forecasting tools help automate reordering, predict labor needs, and account for changes in order volume, making it easy to understand what’s coming and reduce inventory carrying costs. This saves time and manpower for warehouse management and all staff.
4. More efficient production cycle
Inventory forecasting helps you manage products better across the entire supply chain. When you know your manufacturer’s lead times, your warehouse receiving timelines, and the exact stock levels for each product that you need to make a new purchase order, you can work more efficiently with your supplier and gain a better understanding of production cycles.
This way, it’s not a guessing game or just ordering more inventory once it seems like you’re running low. You can make informed decisions and eliminate the need to expedite production schedules and shipments.
“Our B2C and B2B order volume changes month to month. Between shipping new collections for wholesale earlier in the year and Q4 madness for direct-to-consumer sales, we’ve been able to get through our heaviest seasons while staying ahead of production using ShipBob’s forecasting tools — even as order volume more than quadrupled in a year.”
Ryan Casas, COO of iloveplum
What you need to know to forecast inventory
There are many factors that work together to predict demand in both the short- and long-term. Learn how to forecast inventory by first familiarizing yourself with the terms and concepts below.
A forecast period is the length of time used to determine the exact inventory quantities you’ll need to order. Choosing the right time period will depend on your manufacturing production cycle and your inventory turnover rate, or how fast you sell through your products. For example, if you sell through your inventory quickly, you will repurchase new inventory more often.
A trend is a change in demand over a certain amount of time. For example, a business that sells ski equipment sees a major seasonal trend of items sold in the winter months. Using this information, they know that order volume will ramp up leading into winter and slow down once spring arrives.
Below is an example of a highly seasonal brand that experiences incredible demand during one part of the year and virtually zero orders the rest of the year. Their inventory forecasting will be very different than a brand with consistent demand or gradual growth.
You can get even more granular and analyze trends through a customer’s lifetime with you or across different combinations of SKUs:
- Do customers buy the same items from you more than once?
- Are customers buying multiple items from you each time they place an order?
- Which products are frequently purchased together?
As you acquire new customers, you may be able to predict any repeat purchases using this information. Monitoring which products are purchased together can help you understand your customers’ behavior and even help you decide how to group your products for new offers or promotions. You may even find patterns of how one SKU affects or drives demand for another.
For example, if you sell razors and separate blade cartridge refills, what’s the ratio of blades to razor sold? Does that amount continue to increase over time and extend the lifetime value of a customer? Any type of recurring revenue or subscription-based purchases can help with inventory forecasting.
Maximum stock level
This is the ideal stock level for a given SKU and what the inventory count will be in the bin or on the shelf when it’s completely full. If you have unlimited funds and inventory storage space, this can be a higher number. It just can’t exceed the space allotted for that particular SKU.
Your stock depletes as you fulfill orders, so you’ll need to replenish it when it drops down to a certain number. The quantity at which you create a new purchase order is the reorder point. The reorder point formula is not just a soon-to-be out-of-stock warning, but rather a proactive and strategic level that takes several factors into account.
To calculate reorder points for your products, add up the following number of days:
- Your manufacturer’s lead time for sending inventory to you (AKA the number of days it takes to receive new inventory at your warehouse from ordering it)
- Your warehouse’s or retail fulfillment company’s inventory receiving turnaround time (if applicable)
- Your safety stock number of days in case of a sudden spike in customer demand or delay on the manufacturer’s end
Next, multiply the number you got above by your average inventory demand per day. This number is your reorder point!
When a SKU’s stock level drops down to the predetermined reorder point, you’ll need to trigger an alert so that your inventory planner is aware and can create a purchase order (using the reorder quantity formula).
Best practices for inventory forecasting
Good inventory management lends itself to good inventory forecasting. Here are some fundamentals that can help your business get the right inventory forecasting process in place.
Involve other teams
Inventory forecasting can’t be done in a silo. Whoever owns it must involve all key stakeholders including operations, finance, marketing, product development, and more. Each group has a unique perspective and the input needed to create the most accurate forecast possible.
Take notes and revisit them for future planning
Tracking order volume isn’t always enough. Sometimes you need to write annotations to add context or not forget the reason for a change in demand.
List out any upcoming flash sales, known holidays (including those impacting your manufacturer such as Chinese New Year), and other events that may cause your sales or production cycle to either slow down or ramp up. This way, you can look back at your notes from the previous year(s) to plan for the next year.
It’s important to note that if inaccurate demand forecasting was caused by something unpredictable (e.g., you got a surprise shoutout in a major publication, your product was in a celebrity’s Instagram post, etc.), then you wouldn’t necessarily project that exact same spike into your forecast.
However, if last-minute Mother’s Day shoppers ended up bringing in a lot of sales for your business, you can use that information to expect a similar performance in May of next year.
Utilize your data
Before you can determine when to reorder inventory, you need to understand how your inventory has moved historically. Your past sales and inventory data should guide future decisions and help you be proactive, not reactive. This way, your inventory forecasting process can be repeatable and use a consistent forecast period.
View real-time stock levels
To accurately predict future demand, you need accurate, timely data. Real-time inventory tracking lets you monitor actual stock levels at any point in time and helps you keep tabs on whether your estimates were precise or drastically off. If they were inaccurate, examine the root cause. Understanding why this happened will help you learn from the past and adjust your forecast as you go.
Choose the right software
Replenishing inventory at the right time and in the right quantities can feel like trying to solve an ever-changing puzzle. Step one is to centralize all of your data across sales channels. You won’t get very far if your data lives in silos.
Make sure the software you use has all of the functionality that makes sense for your business’s size, product catalog, and complexity. Depending on your unique needs, it might be a standalone inventory forecasting tool or an end-to-end fulfillment solution like ShipBob that notifies you when it’s time to replenish inventory.
“Our favorite aspects of ShipBob’s fulfillment software are the algorithm and analytics. ShipBob’s analytics dashboard has a lot of valuable reports that show our top-selling states, order revenue and costs, units sold, sales by SKU, days of inventory, SKU velocity, sales vs. inventory distributions showing where our customers are and where we’re shipping from, and more.”
Andrew Hardy, COO of Nature’s Ultra
6 tools and methods for inventory forecasting
Inventory forecasting can become increasingly more difficult the faster your business grows and the more products you sell. Here are some inventory forecasting tool, models, and methodologies to help with accurate demand planning.
1. Quantitative forecasting
This model of inventory forecasting uses historical sales data to anticipate future sales. The longer the business or products have been around, the better the data set and analysis will be. You need at least a year of sales to see any seasonal trends, but several years of data is even more meaningful as it will help identify true consistency and annual patterns.
In the chart below, you can see overall demand for one brand over a two-year period. Their monthly order volume can fluctuate up or down by approximately 1,000 orders in either direction. Because it’s not a straight line going up and to the right, they’d benefit from keeping extra safety stock available for the busier months.
This brand has had steady growth and increased demand by 3,000 orders per year. They can use their historical data to help estimate what to expect in the future.
2. Qualitative forecasting
This model uses less data from the merchant’s customer order history and instead relies on external factors like market intelligence, environmental forces, economic demand, and other macro-level shifts. Qualitative forecasting uses expert judgment and isn’t a task to be performed by just anybody.
3. Microsoft Excel
Even though you can do some modeling with spreadsheets, Excel sheets are one of the worst ways to manage and forecast inventory because they represent a static snapshot in time and are not connected to other tools or updated in real-time. Inventory forecasting should be very dynamic, automatically pulling in data feeds from several sources for the most up-to-date information.
As your business grows and you need larger quantities of product to meet demand, it becomes more difficult and also more critical to get inventory planning right. Many ecommerce businesses outsource fulfillment to a third-party logistics (3PL) provider, so they don’t have to build the infrastructure, dedicate resources, and hire the workforce to manage inventory and logistics themselves.
Not all 3PLs have integrated software for order, inventory, and warehouse management, but ShipBob provides all of this to help brands forecast properly. Because 3PLs are so large, they can also help a business experiencing unplanned demand or rapid, explosive growth.
“We roll out new products and designs on our website 1-3 times a month and send new inventory to ShipBob each week. It’s really easy to create new SKUs and restock existing ones using ShipBob’s technology, which is especially important with high inventory turnover.”
Carl Protsch, Co-Founder of FLEO Shorts
It’s important to note that communication with a 3PL is key — if you’re expecting a spike in demand, whether your brand is being featured on a TV show or offering an ecommerce flash sale that can deplete inventory, let them know ahead of time so they can plan for it as well.
5. Inventory management software
If you manage order fulfillment yourself, or your 3PL doesn’t provide the right software, there are inventory management solutions that also include forecasting tools. This lets you monitor the inventory you have on hand and units sold per day, run reports to see which SKUs are your best sellers, and maintain an understanding of how your business is performing.
“One of the greatest features of ShipBob’s software is the inventory management functionality, which lets us track inventory change and velocity over time. Being able to monitor which styles are selling quickly helps us always keep our best sellers in stock.”
Ryan Casas, COO of iloveplum
6. Inventory forecasting tools
Besides 3PLs and inventory management systems, there are tools designed specifically for inventory forecasting with distribution metrics, data visualizations, advanced analytics, and inventory reports on sales and stock metrics. This helps you connect the upstream activities of purchasing and manufacturing to the downstream activities of sales and product demand.
When it comes to inventory forecasting, there is no crystal ball. Even when you have the best tools to estimate demand, at the end of the day, it is just that – an estimate. But continuously reviewing inventory turnover, stock counts, and other trends in your customer orders, you’ll more accurately plan for both the short-term and long-term.
If you’re in the market for a 3PL that can help you manage inventory and forecast demand, check out ShipBob. With ShipBob’s thousands of customers, integrated technology, fulfillment services, and ecommerce warehouses, you can easily connect all the places you sell online to your inventory in our warehouses for a seamless ecommerce fulfillment experience. Learn more by requesting a price quote.