Inventory forecasting is a considerable aspect of any business that deals with selling physical goods or provides customer service. The major goal of inventory forecasting is maximizing the number of orders that can be fulfilled while minimizing the number of items in stock.
Forecasting helps predict future stock levels by analyzing the past sales of each item from inventory. On the first look, the idea is very easy: to supply the number of goods that will satisfy the demand. However, it is difficult and even impossible to define the accurate number of items needed in the future.
Using an inventory software system to forecast customer demand can help to increase the ability to estimate future sales and, as a result, can help to reduce stock shortages or overstocks.
How to make an informed prediction?
1. Lead time – the time between order placement and delivery of ordered goods from a vendor.
2. Safety stock – a level of extra stock maintained to mitigate the risk of stockouts due to uncertainties in demand or unexpected breaking down of the supply chain.
3. Economic order quantity – the order quantity minimizing the total costs that include:
a. purchase cost – costs of ordered goods;
b. ordering cost – expenses met with creating and processing order to a vendor;
c. holding cost – expenses associated with storing unsold inventory.
4. Reorder point – the minimum inventory level when the item must be reordered if the stock falls to this quantity.
5. Reorder quantity – the number of item units that will provide the best balance between the many factors, including:
a. quantity discount – decreased cost per unit of goods or materials purchased in greater numbers;
b. freight – the charge paid for the transportation of goods by land, air, or sea;
c. storage costs – expenses associated with storing goods or materials;
d. working capital requirements - the funds required to be kept on hand by the company to pay its debt obligations and other business-related expenses.
6. Base demand – the current demand.
7. Forecast period – a period for which a forecast is prepared.
8. Trend – increasing or decreasing customer demand over the forecasting period.
The starting point for forecasting is the current customer demand. Identifying the tendency of increasing or decreasing customer demand over a certain period makes it easier to project future sales. The balance of optimal safety stock and strategic inventory investments is an important component of efficient inventory planning. The tradeoff between inventory cost and provided service is the main goal of inventory optimization. Demand planning and forecasting helps to reach better returns on invested capital and provide better service to customers.