Types and Models of Inventory Forecasting
Inventory management is undoubtedly one of the most important aspects of business and supply chain planning success. A key element of inventory management is the practice of inventory forecasting, which entails looking at past data and trends to predict inventory requirements for the future. Accurate forecasting becomes increasingly essential as your business grows – though it may also become more challenging during times of growth. Forecasting must be precise and efficient to protect your bottom line and ensure the best customer experience.
Before diving deeper into the nuances of inventory forecasting, take a moment to consider how you’re currently collecting data and where you potentially have gaps. Below, we’ve highlighted four types of inventory forecasting to consider.
#1) Trend Forecasting
Trend forecasting looks at changes in demand for specific products over time. While this method is geared to examine trends, the trend analysis it can perform is limited to an extent. For example, seasonal fluctuations (such as holiday item purchases) and in-season necessities (such as bathing suits) are not accounted for when trend forecasting.
Why is this?
Trend forecasting utilizes granular sales data to forecast whether a customer is likely to make purchases in the future. Though limited in some aspects, this data is beneficial because it can be used to make decisions by marketing, purchasing, and business expansion departments.
#2) Qualitative Forecasting
In our experience, qualitative forecasting is the best method to consider if your company has little to no historical sales data to reference. Qualitative forecasting allows you to collect data directly from your customers through focus groups, interviews, and market research. Your inventory forecasting team can use the newly collected information to flesh out additional forecasting models.
#3) Graphical Forecasting
Graphical forecasting visualizes numerical data by placing it into charts, graphs, and other statistical models. Visual data makes interpreting sales peaks, valleys, and other buying patterns easier. The faster you can understand a data set, the sooner you can utilize it to make decisions.
#4) Quantitative Forecasting
Quantitative forecasting is often more reliable than qualitative forecasting because it utilizes historical numerical data. It is an objective – and often mathematical – process that a sales team can use to make predictions confidently. There are several subtypes of quantitative forecasting, including regression analysis, moving average, and exponential smoothing.
Which Type of Inventory Forecasting is Best for Me?
Now that you know the many avenues you can take to conduct inventory forecasting, one question remains: which is the best for your business? Before you make that decision, remember to consider your data first. The type and amount of data accessible to you is often the best way to decide which model to use. As a note, you don’t have to stick to just one model! The most efficient inventory forecasts utilize multiple models to create an in-depth prediction through multiple angles and perspectives.
Best Practices for Inventory Forecasting
Data is critical to your business regardless of the number of forecasting models you use. Six months’ worth of sales history is generally a good place to start, although data from more extended periods can give you better insight into patterns of monthly and even seasonal demand. Here are a few additional best practices that can ensure your inventory forecasts are done accurately and executed smoothly:
- A collaborative team
- Documented inventory management processes
- Inventory turnover insights
- Safety stock calculations
Inventory forecasting is achieved successfully through several models, and the primary goal is to use past information to make decisions for the future, thus helping your business run smoothly. Selecting the forecasting model (or models) that best meets your needs can help you plan effectively – and if you don’t know where to start, that’s where we can help.
Reach out to one of our experts today or visit our resource hub for more helpful tips.