What Is Inventory Forecasting?
As the term suggests, forecasting is making an informed prediction about placing an order. Using forecasting models such as determining reorder points and economic order quantities can help ensure optimal inventory control.
Certain boundaries have to be set in place to give the most accurate outcome:
- Forecast period
A forecast period is a specific amount of time which decides the forecast quantity.
A trend is an increase or decrease in demand over a certain period of time. Identifying one such trend makes it easier to project future sales.
- Base demand
The base demand is simply the starting point for a forecast (i.e. current demand).
Forecasting is in turn linked to determining reorder points and order quantities, both of which are critical to optimizing inventory control.
The reorder point answers the question of WHEN to order. Forecasting is exceptionally important for wholesale businesses, as they deal with higher quantities of stock and capital. It is the level of inventory which triggers an action to replenish that certain stock. Yet lead time (the time before the products are delivered has to be taken into consideration, since instantaneous replenishment of stock levels is not possible, and that’s where safety stock (extra stock carried to prepare for uncertainties in demand and supply) comes into play.
A basic formula for the reorder point is:
Reorder level = Average daily usage rate x lead-time in days
Basically, there just has to always be enough inventory to cover the lead time while waiting for new stock to arrive.
So now that we’ve figured out when to order, the next step is to decide how much to order.
Economic Order Quantity (EOQ)
Your EOQ is a key part of the forecasting process. Through your EOQ, you'll be able to decide on the ideal order quantity that minimizes inventory costs while matching customer demand.
In order to calculate your EOQ, you'll need your annual demand, fixed costs, and annual carrying cost per unit. Your fixed costs are the amount you have to spend on procuring stock, covering approval processes, inspections, and so on, while carrying costs are what you spend on storage and utillities.
If you've got your business up and running, you just need to look through your past records to figure out how much you've spent on procuring stock and last year's demand.
To save you time on doing the maths manually for every single item, we've built an EOQ calculator just for you.
Finally, there is the monitoring of inventory levels.
Monitoring inventory levels is a big help in inventory control. Doing so ensures that you never run out of popular items, as well as helping you to gauge the trends and demands for the items you carry, which in turn can help you in forecasting.
A good way to monitor your inventory is to have an inventory management system that removes items from your inventory once they are purchased.
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