Forecasting Inventory: Why It Is Important And How to Forecast Inventory in Your Business
Inventory forecasting is all about helping your business understand what you need, how much you need, and when you’ll need it. Knowing these three factors is an essential part of inventory planning. Having a strong plan around your inventory positioning will help keep your stock numbers healthy and your business prepared.
As a Shopify store owner, accurate inventory forecasting is essential. However, ensuring you have enough stock to meet customer demand and promote sales, while avoiding over-stocking and spending money on unnecessary storage, is a tricky balance.
In this article from Upscribe, we’re going to dive into inventory forecasting, why it’s important and how to implement it in your business. We’ll also take a look at what data you need to forecast inventory, and give you an idea of how you can use forecasting inventory to your advantage. Let’s jump in.
What is Inventory Forecasting?
Inventory forecasting —otherwise known as , demand planning — is all about understanding your product quantity needs. Broadly speaking, it’s about using past sales data and trend forecasting (we’ll get into this later), to try and predict your needed inventory over periods of time.
By using customer sales data to identify buying trends and patterns throughout the year, your business can better prepare for expected spikes and dips in sales. That also means that you’ll be able to keep optimum stock levels, rather than over-stocking or under-stocking.
Different Types of Inventory Forecasting
Trend forecasting is drawing on past sales data over a particular length of time to identify patterns in your customers’ buying habits. Your business can use these patterns as guidelines for estimating average customer demand throughout different periods of the year. That way, you can prepare for busy or quiet periods effectively, by ensuring you’re storing the optimum amount of stock for these times.
Micro versus Macro Trends
Depending on what you want to prioritize during inventory forecasting sessions, you may choose to examine micro or macro trends.
Micro trends focus on specific products or product lines. They narrow down the time frame from which you pull sales data to only a few weeks and helps you plan for shorter-term or specific holiday/seasonal inventory re-stocks.
Macro trends look at the bigger picture. They analyze a range of products over a longer time period, and give you a better idea of overall market conditions and customer buying habits over time. These help you prepare for larger re-stocks.
A great way to visualize trends within your sales data is by producing graphical displays. Graphs allow you to better pinpoint troughs and crests within your sales over time, so you can better estimate and prepare for higher or lower stock needs in the future.
Qualitative and Quantitative Forecasting
Qualitative forecasting is all about drawing understanding from non-numerical data. This type of data can be sourced from:
- Customer surveys
- Feedback forms
- Online reviews
- Social media comments and messages
Although you’ll need a significant amount of this data to start seeing patterns, this type of forecasting can give you a really nuanced, customer-focused perspective.
On the other end of the spectrum, you have quantitative forecasting which relies only on numbers. For example, you can compare sales histories across numerous years to inform your business’ inventory requirements for upcoming periods.
Forecasting Inventory Formulas and Examples
Lead Time Demand
Lead time is the average length of time between ordering products from your supplier and receiving those products.
Your lead time demand is the number of stock units you need to have on-hand after ordering more stock from your supplier. This ensures you don’t run out of product before your shipment arrives.
A formula you can use to determine your lead time demand is:
Lead Time Demand = Average Lead Time in Days x Average Daily Units Sold
- Supplier’s average lead time is 6 days
- 23 units sold daily
You would calculate your lead time demand to be:
6 x 23 = 138
That means once there are 138 units of this particular stock item, you’ll need to reorder to ensure you don’t run out.
Safety stock is the minimum level of stock your business needs to have on-hand at all times to ensure you can meet unexpected fluctuations in customer demand.
A formula you can use to determine your safety stock numbers is:
Safety Stock = (Maximum Daily Units Sold x Maximum Lead Time in Days) – (Average Daily Units Sold x Average Lead Time in Days)
For instance, let’s say on average you sold an average daily unit of 23 for a particular item, but on some days it could increase to a maximum of 38. Now, let’s say your supplier has an average lead time of 6 days, but it can sometimes take a maximum of 9 to deliver. Your formula would look something like this:
(38 x 9) – (6 x 23) = 204
That means you’ll need to make sure that you’ll need to have 204 units on-hand to ensure you have enough stock to deal with unforeseen circumstances.
Reorder Points (ROPs)
A reorder point (ROP) is a hard benchmark for when your business should order more stock.
To gauge your products’ average ROPs, you can use the following formula:
Reorder Point = Lead Time Demand x Safety Stock
Inventory forecasting plays a critical role in ensuring your ROPs are accurately serving your business. By utilizing sales trends, your business can move your ROPs forwards or backwards to better reflect projected demand.
Why is Inventory Forecasting important?
Reduces Inventory Holding Costs
As a Shopify store owner, you’ll need adequate holding space to store your inventory. Inventory forecasting helps you manage your storage space effectively. This means:
- Only storing inventory you actually need
- Reducing the risk of paying for wasted storage space
By properly forecasting your inventory needs, you’ll reduce the overall costs incurred by holding and managing your storage spaces.
More Efficient Production Cycle
Inventory forecasting helps you manage your products effectively across the whole retail supply chain.
By taking into account your:
- Historical sales trends
- Your supplier’s lead times
- Your ROPs and safety stock numbers
- Available warehouse storage space
You’ll have a better understanding of your inventory demands. You can use this information to better inform how you work with your suppliers to effectively replenish your stock and streamline your production cycle.
Improve the Customer Experience
Effective inventory forecasting minimizes the risk of having to display the dreaded ‘out-of-stock’ message on your Shopify store. By accurately managing stock demands, you’ll keep your customers happy and reduce churn.
How do you Forecast Inventory?
Step 1- Identify sales trends
Through Shopify, you can access past customer data and identify sales trends across products. Here, you want to identify two main pieces of information for all of your products:
- What are your average daily and weekly sales numbers for each product?
- How do sales for specific products peak and dip throughout the year?
To draw more accurate average sale numbers, you’ll want to draw from as much historical data as possible. A great way to visualize this data is to graphically format it so you can follow your sales developments.
Step 2 – Create a Sales Forecast
Answering the questions in Step 1 with data can help you create a sales forecast — predicting how much your Shopify store is likely to sell weekly, monthly, and annually.
To understand sale nuances for specific products or product lines, you’ll need to ask yourself some basic questions, including:
- When did specific products sell well? Did this spike correlate with a specific season, holiday, or social trend?
- What products are consistently selling?
- What products are not selling well or slowing down in sales? Did these sale dips correlate with a specific season, holiday, or social trend?
Step 3 – Know your key benchmark numbers and lead time demand
Your key benchmark figures that anchor your inventory timeline include:
- Average lead times for your suppliers
- Average lead time demand for each product
- Safety stock levels for each product
- Your ROPs for each product
These figures will act as your “checkpoints” to ensure your inventory levels can always meet your average customer demand.
Step 4: Create Your Replenishment List
The information you’ve pulled from Steps 1-3 will help you make a replenishment list.
This list will include all the products you sell in your Shopify store and their average replenishment cycles.
These cycles should help you determine when you should re-order stock from your suppliers, alongside an estimate of how much you should order.
Although helpful, it’s important to note that these cycles are average estimates of when and how much your store will need to meet customer demand. It’s imperative you’re regularly conducting inventory forecasting to ensure your replenishment cycles are reflecting current demand.
Best Practices For Forecasting Inventory
Set A Forecast Period
Depending on the type of products your Shopify store sells, your inventory forecast period will differ.
Businesses that sell products that are mass-produced and have quick turnovers, such as fast fashion brands, will generally have shorter forecasting cycles. These sorts of businesses will normally conduct forecasts for 30-day periods.
Ecommerce businesses that sell longer-kept statement pieces, such as furniture, usually have longer manufacturing lead times and require longer forecasting periods.
These periods can be quarterly, bi-annuall or annually. These longer forecasting periods give businesses the time to:
- Prepare for longer lead times
- Optimize their stock space
Determine What to Measure and How Often
Implement inventory and order management systems that can provide your business with in-depth analytics for key data points. These metrics enable your business to conduct customer sales research, so you can identify trends. These trends and patterns can inform your business of likely customer demand for different products throughout your chosen forecasting period.
Your inventory and order management systems should provide data on these key data points:
- POS data
- Stock counts and amount of obsolete stock
- Frequency of stockouts
- Shipment quantities
- Orders and/or subscriptions
Future Estimation and Planning
Consistent and systematic inventory forecasting not only plans for what could happen, but can provide your business with the opportunity to maximize future sales opportunities.
You could plan to host a holiday sale during slower periods. Or, offer promotions on products you know will sell well during a particular holiday, maximizing buyer incentive.
A great way to increase future sales and more accurately forecast inventory is to implement a subscription model within your Shopify business. Why?
When you offer subscriptions, you are more accurately able to predict inventory. When you get a subscriber, they are committing to purchase a certain amount of your product during a defined period. Having access to this information allows you to more accurately forecast revenue when compared to basing your inventory needs off of one-off purchases.
Upscribe provides your business with all the necessary customer data you require to know your average benchmarks, identify sales trends and accurately forecast inventory. The platform will also help you prevent churn before it happens by providing customers with the option to:
- Manage their subscriptions through email and SMS
- Edit their subscription
- Skip a shipment
For customers that don’t want the commitment of an ongoing subscription, Upscribe offers the ‘Reorder’ function.
With just a click of a button, your customers can reorder previous purchases. This function streamlines the customer journey by reducing the time it takes to reorder previous baskets. By optimizing the checkout journey this way, customers are more likely to return and repurchase your products, boosting your overall sales.
Alongside growth tools, Upscribe not only simplifies inventory forecasting but actively aims to help you grow your Shopify business as well.
Ready to start forecasting your inventory?
Understanding what information you need and how you’ll get it is key to accurate inventory forecasting. As a Shopify store owner, you’ll want to know your:
- Lead times
- Lead time demands
- Safety Stock numbers
- Historical sales data (as much as possible)
Implementing a subscription management tool like Upscribe is a great, easy way to not only obtain these data points but also maximize sales opportunities.
With Upscribe you’ll encourage subscriber and customer loyalty through a second-to-none customer checkout experience, easy-to-manage subscriptions and one-click ‘Reorder’ options.
Try Upscribe for yourself and streamline your customer journeys today!!