Inventory Forecasting Strategy: Best Practices Guide

All businesses, regardless of industry, rely upon some form of forecasting within their supply chain in order to maintain a positive balance between supply and demand. Knowing how to properly forecast this and the methodologies used to accurately ensure that your inventory is stocked at the right time is critical to being able to cater to your customers, especially when consumer demand peaks during holiday seasons.

In this blog post, we'll explore several ways you can improve your inventory forecasting strategy.

Find Balance Between the Demand Forecast and Sales Forecast

As trends have substantially shifted in many ways over the past 2-3 years, relying upon previous sales data may not be the best way to forecast accurately.

Aside from not relying on past sales data to be your main set of information upon which you base future demand and inventory planning, you should also regularly scour your data sets to ensure it's not corrupt or misleading. The information should be looked over manually, as software platforms will not always catch or identify certain issues.

For instance, if the customer only wants to order three of a specific product but the minimum order is five, customers will order five if it is feasible for them to do so. If they make the purchase, this data gets recorded.

However, this is what most would consider inaccurate data, as this would not reflect the true demand of the product or goods, which could then leave you holding quite a bit of overstock. It is usually these smaller and more nuanced issues that end up becoming large issues built up over time.

Use the ABC Analysis Method to Filter Expectations

Companies should use the ABC analysis to filter data of importance. The ABC method of inventory management and forecasting simply relies on taking a look at the areas that are of the most importance to the business.

With the ABC analysis, the tasks are prioritized by identifying customers or projects which are important to the company and honing in on those specific areas. This is an especially useful way of going about inventory forecasting if the company already has some idea of their key demographics and which goods are clearly in demand.

If those are already visible as crucial areas of concern before any analysis takes place, it stands to reason that it might be wise to go ahead and place the emphasis on these areas versus wading through twice the amount of data that may be of no consequence at the moment. This cuts down on the time it will require to properly collect and analyze the gathered data, getting you closer to a clearer picture of what you need to do, faster.

Compare Historical Data

One way in which you can increase the accuracy of your forecasting software is to set it to compare the numbers over a period of time.

This is not always going to be the one thing that you should rely on as there are times in which historical data can be severely misleading.

When dealing with historical data, ask yourself:

• How old is the data that is being computed and compared?
• Does the software factor in natural causes of fluctuation?
• What external factors may have influenced past results?

Calculate Your Reserve Inventory Regularly

It cannot be stressed enough how much companies need to calculate and revisit their reserve inventory on a regular basis.

Gather statistical data to understand the required production, lead times, and manufacturing schedule needed to accurately meet the demand. Couple this hard data with information from warehouse and inventory management software platforms, and you can begin to develop a picture of how much inventory, outside of simply meeting demand, you need to have on-hand in the event that demand fluctuates further. You need to be able to have enough that you can fulfill the demand that exceeds your previous calculations but won't leave you holding the bag, so to speak, when that demand actually falls below what you had anticipated.

Keep your supply operations data up to date to achieve accurate future calculations. Update your calculations every three to six months to ensure decisions are calculated on the most relevant data.

Know who Determines the Frequency for Producing and/or Ordering Inventory

Knowing how your inventory is ordered and produced—whether through just-in-time methods or batch scheduling—is critical to maintaining the best forecasting steps, as it allows you to have a better overview of what those processes may involve. You can then work out and translate back into your strategy with a more aligned concept of the time it will take to have goods on-hand.

Determine who handles this process:

• Cross-functional team – Ideal for setting production and ordering schedules as they can determine the S&OP strategy needed to reduce and replenish stock more precisely.
• Planning and sourcing manager – A single point of accountability for inventory decisions.

Track the Competition

If you wish to have accurate forecasting, you will benefit from taking a look at what your competition is doing.

Demand trends will show with competitors, especially if the supply causes serious stockouts. Take note of how they handle peak times as well as downtimes.

Are they able to easily leverage the influx of demand when it happens, or do they sink under the weight? What are they doing right or wrong that causes either result? How does your business compare to this?

This one simple step may help you avoid demand surges, minimizing your risk of a stockout, without having to experience it yourself.

Pay attention to what others in your industry are doing and learn from their mistakes.

Don't Overestimate

Using inventory software is crucial to keeping your inventory forecasts realistic. When forecasting is placed outside of data calculations, present conditions, and historical data, the risk of human error increases.

Supply Chains are more apt to overestimate hoping to avoid a stockout than they are to keep the supply low to meet the demand. While it is important to review data to ensure accuracy, it is equally important to let your inventory systems do their jobs, including:

• WMS (Warehouse Management System)
• IMS (Inventory Management System)

Final Thoughts

Effective inventory forecasting requires balancing historical data with current market conditions, leveraging the right tools, and continuously refining your approach. By implementing these strategies—from ABC analysis to regular reserve inventory calculations—you can reduce stockouts, minimize overstock, and better serve your customers during peak demand periods. If you need expert guidance on optimizing your inventory forecasting strategy, contact Redwood Logistics to learn how our supply chain solutions can help your business maintain the right balance between supply and demand.