3 Strategies for Inventory Forecasting
Inventory forecasting is a crucial part of inventory management and the success of your Amazon business.
What is inventory forecasting? It’s a method to the madness that is predicting the amount of stock your business will need.
Why is Inventory Forecasting Important?
Stockouts happen when there’s not enough inventory for the current demand. This is really bad news. If a customer tries ordering your product on Amazon and they’re unable to, they’re going to turn to a competitor and your Amazon ranking will suffer.
Not having enough inventory is bad, but having too much isn’t ideal either. Amazon FBA businesses have to pay hefty fees for keeping too many products in Amazon’s warehouses. If you have your own facility, then you risk cramping up your workspace and creating an unsafe/uncomfortable environment.
Inventory forecasting can help you learn which products aren’t selling as often as they used to. You can use this information to plan production accordingly. If you have a ton of products lying around that aren’t going to sell, then you might have to toss them out and lose some money.
Basic Inventory Forecasting Formulas
There are plenty of strategies when it comes to inventory forecasting. However, there are some basic formulas that are helpful to know regardless of which strategy you’d like to apply to your business.
- Lead demand = Lead time * Daily average sales. Lead time is the number of days it takes for your vendor to fulfill your order. Lead demand will help you predict product demand.
- Safety stock = (maximum daily sales * maximum lead time in days) – (average daily sales x average lead time in days). Safety stock covers any fluctuations in demand. Too much and you’re going to pay an excess in fees. Not enough and you won’t be prepared for demand fluctuations.
- Reorder point = Lead demand + Safety stock. A reorder point is the specific number at which you’ll want to order more stock so as to not run out of inventory. It’s good to know this number so you won’t go too long without replenishing stock. If you do, then you risk going out of stock which will hurt your overall performance on Amazon.
- Inventory turnover ratio = Cost of goods sold ÷ Average inventory. Your inventory ratio is the rate at which inventory stock is sold.
You should calculate these numbers before you go about picking and implementing an inventory forecasting strategy.
Today, we’re going to go over 3 strategies for inventory forecasting.
Algorithmic Inventory Forecasting
Algorithmic inventory forecasting is an AI-powered process in which businesses are able to predict inventory needs with technology.
Algorithmic inventory forecasting is much more efficient and effective than manual forecasting. Humans need to input information on spreadsheets and calculate numbers to do the same things that AI could do in much less time. AI learns from previous mistakes and considers tons of factors when crunching numbers.
While technology is powerful, it could be enhanced and strengthened with aid from humans.
The most prominent benefit of algorithmic forecasting is the fact that AI learns and considers far more factors than humans are realistically able to do.
Linear Regression Forecasting
Linear regression forecasting (LRF) is a statistical tool used to predict future values from past values. It’s important to set a timeframe and keep track of sales/inventory numbers in that timeframe.
Documenting sales and inventory numbers are important in order to accurately graph and predict future inventory management needs.
You or a team will need to watch the graph and try to notice general patterns or fluctuations with events (such as a season change, holiday, or a trend).
When you notice patterns, you’ll be able to apply that information to inventory management.
This strategy is advanced and not too difficult to implement. It will take some work but it isn’t impossible. A lot of software out there will help you forecast inventory with LRF.
Inventory averaging is predicting inventory management needs by finding the mean value of inventory within a certain time period. You could calculate it by averaging the starting and ending inventory values over a specified period.
It’s important to set different time periods in order to accurately predict inventory needs. For example, a jacket company might want to calculate the demand for jacket sales in June separately from the demand in December. It’s important to also calculate demand for a week as well as a year.
Average inventory = (Current inventory + Previous inventory) + Number of periods.
This method of inventory forecasting is the easiest for beginners. It’s simple and easy to calculate the average inventory which will allow you to hit numbers in the general ballpark of what you need.
However, some businesses may find that inventory averaging isn’t as sophisticated as LRF or algorithmic inventory forecasting. For example, you can’t really consider new trends that might put a spike in your product’s demand. When something like this happens, you’re going to have to put a very rough estimate in your order. If you’re ordering stock on inaccurate numbers, then you might have to pay hefty fees or lose out on a ton of profit.
Need Help with Inventory Forecasting? Let ShipmentBot Help!
Inventory forecasting isn’t an easy feat. It could be challenging. It’s a crucial part of the business that you need to learn if you want to maximize profit. There are tons of numbers to crunch, spreadsheets to make, and reports to create. However, you don’t have to go at it alone.
If you’re looking for software that can automate repetitive Amazon tasks, then look no further. ShipmentBot can forecast inventory, create reports, and even print labels.
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If you want to learn more about inventory management, then check out this article.