How to Forecast Inventory Needs for Your Retail Business

As a retail business owner, you must know how much inventory you need to carry to meet your customer needs. When you are worried about getting out of stock, the easiest way you can do is to reorder. But, can you sell your goods quickly?

Inventory shortages slow down the order fulfillment process, leading to customer disappointment. However, excessive stock can cause other problems, such as waste, damage, value reduction, etc. This is why you need to forecast your inventory needs. For those reasons, many companies are switching to ERP systems to manage their inventory stock.

What is Demand Forecasting?

Demand forecasting is the practice of predicting which and how many items customers will buy for a certain period of time. This usually uses historical data and external analysis (such as holidays, consumer trends, etc.).

Inventory forecasting can help you determine when to order new products and how many to buy. When forecasting, you must consider the lead time needed to determine your reorder point.

What is Lead Time?

Lead time is when it takes from the first time you place an order with your supplier to when it arrives. In other words, it is the time it takes for new items to arrive. Most suppliers provide estimated lead times. However, using your data to calculate your lead time accurately is best.

What is Reorder Point?

Reorder point is the inventory level that requires you to replenish stock immediately. Simply put, it is the minimum quantity of an item you have, so when a stock drops to this level, you must reorder the item immediately. Integrating the purchasing system with IMS will help you plan inventory costs, control the procurement of goods, and manage orders better, which will prevent your business from being out of stock.

Related Article: 6 Efficient Ways to Prevent Inventory Shrinkage in Retail

How to Forecast Inventory Needs

According to Carlos Castelán, managing director of The Navio Group, a retail consulting firm that has worked with Whole Foods, CVS, and Kraft Heinz, forecasting inventory needs is one of the most difficult analyzes to get right because you must ensure that you don’t forecast too little, but not too much either.

The following are some methods that you can use to forecast your inventory needs:

Qualitative

Qualitative forecasting is a forecasting method that relies on expert judgment instead of numerical analysis. Unlike a quantitative method that counts on historical data, qualitative forecasting depends on the knowledge of highly experienced staff and consultants, taking into account various factors that will affect future demand.

Time series analysis

This method is similar to the quantitative method because it requires historical data to analyze trends. You must use an analytical approach to accurately forecast inventory needs by examining sales channels, suppliers and demands.

Causal

The causal model is the most sophisticated and complex forecasting method because it uses specific information related to relationships between variables that affect demand in the market, such as competitors, economic strength, and other socioeconomic factors.

For example, if you sell jackets, then you can see factors such as your historical sales data, marketing budget, promotional activities, any new jacket stores in your area, the price of your competitors, weather, overall demand for jackets in your area, and so on. By using CRM-Sales Software, you can automatically deduct and record which inventory is being used, sold, or consumed in real time.

Simulation

Simulation forecasting is an approach that combines all methods, both qualitative and quantitative, to provide more holistic insights. However, it is also the most complicated forecasting technique because it requires considering internal and external factors.

The following are some tips for better demand forecasting:

Prepare comprehensive data

Without data, it will be very difficult for you to make accurate forecasts and decisions because you don’t have the critical information required for forecasting. Therefore, ensure you can easily see complete historical data: weekly, monthly, and yearly.

Understand customer shopping habits

To effectively forecast inventory needs, you must understand your customers’ buying behavior patterns. Here are some questions that you should be able to answer:

• Are my customers seasonal or consistent buyers?
• Which products are most popular among customers?
• What kind of products do consumers love right now?
• Where do most of my customers come from?
• How fast do trends affect customer demands?

Implement an Automated Solution

Human error is the main cause of data inaccuracies. When the data is inaccurate, your demand forecasting also goes wrong. So, consider automating your manual work.

Use the HashMicro Inventory Management System to alert you when your inventory runs low, produce complete analytical reports, and allow integration with the purchase, accounting, POS, and other systems.

If you want to try and integrate this system for your business, try out the free demo now!