What is Inventory Forecasting and Why Does it Matter?
What is Inventory Forecasting?
Inventory Forecasting is the process of predicting how much inventory you need to buy based on the amount you believe you will sell in the future.
Why is Inventory Forecasting Important?
Perhaps the most important element of running a successful eCommerce business is having inventory to sell; if you don't forecast the right amount to buy, you can buy too little or too much. Seems obvious and simple enough, right? But the consequences of getting it wrong can have serious negative effects on your business.
The negative consequences of having too little or too much inventory are:
Buying Too Little Inventory:
Lost Sales - If you don’t have products in stock, you can’t sell them. You may be spending marketing dollars to drive visitors to your website, yet if the product they are seeking is out of stock, they don't convert and you don't get the order, making the marketing expense a net loss.
Sales Momentum Swings - when products come in and out of stock frequently, it commonly takes time to earn back the sales velocity the product achieved previously. This is especially true with Amazon.
Opportunity Loss - Ideally, you want to purchase enough inventory to meet market demand without selling out. If you buy too little and run out, there is unmet market demand. The sales history will then represent a unit volume below what could have been sold. This creates a cycle of using sales history with a lower volume to forecast the future sales. It becomes a self-fulfilling prophecy of buying too little, selling below market demand, using the lower volume numbers to forecast the next restock purchase, selling out again the next time, and so on.
Buying Too Much Inventory:
Tying Up Cash - When you buy too much inventory, you convert your cash into physical products. Money spent on slow-moving or unsellable inventory is no longer available to fund other critical parts of your business, operations, etc. (See Inventory and Your eCommerce Business. Do you have too much inventory?)
Space - If you buy too much inventory, you need to pay to store it. If your inventory forecasting is accurate, you will be better able to define the size of your facility or control costs with your 3PL. If you consistently buy too much inventory, not only do you tie up your cash in inventory that’s not turning fast enough, but you also increase your storage costs.
Miscalculating the amount of inventory to buy, either too much or too little, could have serious consequences for the health of your business. This is why inventory forecasting is such a vital and core process.
Why is Demand Planning and Inventory Forecasting Challenging?
Data Analytics is required to manage your inventory forecasting and involves collecting various data inputs and building/maintaining a data model that is easy to use. The main elements include:
Sales History - the number of unit sales by month comes from your source of sale, like a website. If you sell on multiple platforms, like Amazon or eBay, it becomes more complicated to merge all of the sales data. You may also have multiple sales channels like wholesale, retail, etc. All of which need to be integrated into the inventory forecasting model.
Inventory Levels - you need to define and gain access to your source of truth surrounding how much inventory you currently have. This can be challenging if you use a 3PL or have multiple inventory locations. You also need a source of truth for on-order inventory, which is inventory that has been ordered but is not yet in stock.
Data Hygiene - it is common for different systems to possess differently formatted data. For instance, if a SKU number in Amazon is different than your internal SKU number, you won't be able to directly match up sales history to your inventory level.
Data Volume - the sales history never stops. It builds each day. Over time, the amount of data can become overwhelming.
Inventory Forecasting Consulting
We help our clients navigate the challenges involved in inventory forecasting.
Opposite of Work Business Coaching and Consulting offers a custom approach to supporting your inventory forecasting and demand planning processes. We consider your unique configuration and pull together all of the raw data from the various sources relating to your inventory.
Beyond the actual building and maintaining of the inventory forecasting model, we provide support and feedback regarding your specific inventory forecasting challenges and goals. Our goal is to support our clients in turning their inventory forecasting process into a competitive advantage.
To learn more, visit Inventory Forecasting Consulting.