Inventory management is a vital aspect of any business that involves buying, stocking, and selling products.
Effective inventory management ensures you have enough products to meet customer requirements without overstocking and tying up too much capital. A key component of good inventory management is forecasting, which means predicting future inventory needs based on historical data.
This beginner’s guide will guide you through the basics of inventory forecasting, including common techniques and best practices to help you implement an effective inventory forecasting process. With accurate forecasts, you can reduce costs, avoid shortages, and ensure you’re appropriately stocked to meet customer needs.
What Is Inventory Management?
To put it simply, inventory management is the process of storing, ordering, selling, and using the inventory of a company. It further includes managing raw materials, finished products as well as components, especially for the processing of items. There are various types of inventory management that come with their own advantages and disadvantages.
The inventory for any company is one of its most priceless assets. In sectors like food, retail, and manufacturing, the finished products lie at the core of the business. This makes it easy to determine whether the inventory is falling short of a few critical components.
After they are sold, inventory turns into revenue. But what about before selling them? Too much stocking needs money and eventually slows down cash flow. No business would you ever want that! As a result, effective inventory management should be practiced by all industries.
Practising Efficient Inventory Management
If your business is the one producing on demand, the overall inventory management job begins right after receiving the order. It continues till the shipment of the order. But all through these changes, you have to ensure that your products are safe and far from breaking or damaging.
Here are some effective tips for doing so:
Knowing The Demand Forecasting
Inventory forecasting aims to predict consumer demand so inventory can be planned accordingly. Forecasting product demand is no easy task, as many variables are in play – from seasonal trends to broader economic factors. Yet sound inventory management hinges on developing the most accurate forecasts possible.
There are some common demand forecasting techniques, such as:
- Historical sales analysis: Looking at past sales data to identify trends and seasonal fluctuations that can inform future stock needs. This relies heavily on sales records.
- Causal forecasting: Factoring in outside variables like promotions, pricing changes, and economic outlooks that historically impacted sales, then using those causal relationships to predict future demand.
- Qualitative forecasting: Incorporating input from sales teams, vendors, and others familiar with products and industry trends based on experience and domain expertise.
A combination forecasting approach often incorporates quantitative historical data and qualitative insights from subject matter experts.
Setting Accurate Reorder Points.
Reorder points are established when it’s time to replenish a given product. Setting reorder points too high results in poor customer service and stockouts when inventory runs out before new stock arrives. Setting them too low leads to overstocking.
To determine optimal reorder points, first define your lead time – how long it takes from when an order is placed to when the product is received. Then, factor in average daily unit sales from your demand forecast to calculate days of supply on hand. Combine this with desired safety stock levels, and you have your reorder point trigger.
Safety stock is extra inventory beyond forecasted demand to mitigate the risk of shortages from inaccurate forecasts or delivery delays. It acts as a buffer so customers are still served even when projections miss the mark. Factors like inventory holding costs and lost sales potential help determine ideal safety stock levels.
Implementing Effective Purchasing Practices
Your inventory forecasting efforts set purchase plans in motion by determining what needs to be ordered. But buying patterns also impact forecast accuracy, stockouts, wastage, and inventory return on investment (ROI).
Some purchasing best practices are as follows:
- Dynamic order cycles: Use demand volatility scoring to differentiate ordering frequencies, expediting high volume and perishable goods.
- Economic order quantity (EOQ): Balance order sizes based on demand forecasts and bulk order discounts to optimize inventory turnover rates and carry cost savings.
- Lead time analysis: Classify goods by lead times so safety stock assurances are tailored based on known delays and variability.
- Supplier tracking: Detail supplier metrics like fill rate, delivery times, and accuracy to guide future purchase planning and help remedy issues through SLA tracking enforcement.
Monitoring Key Performance Indicators
Several key performance indicators (KPIs) are used to assess inventory forecasting effectiveness and broader inventory control efficiency. Not to mention, leveraging a reputable stock forecasting software can help you with this.
These are some of the things to consider:
- Fill rate measures cycle counting accuracy in terms of record precision. Inventory count adherence over 95% demonstrates reliable tracking.
- Forecast accuracy tracks demand plan performance, with at least 80% accuracy considered reasonable for non-commodities.
- The stockout rate signals demand planning issues and should stay below 2%.
- Overstock rate gauges excess inventory due to bloated forecasts, aiming below 5%.
- Weeks of supply shows how stocked up you are. Consider aligning with typical lead times.
- Fast turnover promotes financial health, though optimal rates vary. Strive for continual improvement.
Monitoring KPIs across inventory, sales, and procurement paints a clearer picture of broader supply chain execution. This engenders trust in inventory projections needed for confident purchase planning and positioning.
Inventory forecasting and demand planning might seem complex parts of inventory management. But they need not be overwhelmed. Implement techniques such as historical sales analysis, economic order quantities, and continual forecast reviews. Over time, you can introduce more advanced methods powered by inventory management software applications.
With a thoughtful approach to forecasting inventory needs plus sound purchasing and stock monitoring practices, your business can better turn inventory for profit. Use these best practices to reduce dead stock, improve turnover rates, and have the right products at the right quantities available for customers. The result is optimized inventory ROI along with expanded sales and revenues.