Ah yes, inventory forecasting. What in the world is that? Inventory forecasting is the practice of using different forms of data and predictive analysis to determine what the demand is going to be for certain products and preemptively adjust inventory numbers accordingly. Demand forecasting tells inventory planners how to forecast inventory, so the two go hand in hand.
This is an extremely important practice that is far too often overlooked by growing DTC merchants looking to take their business to the next level.
While important, inventory forecasting is far harder than many merchants anticipate. There are also many use cases for demand forecasting that even the most sophisticated of tools overlook. In this blog post we’ll dive into those use cases and make our case for why Pricestack can take your demand forecasting to the next level.
1. Prevent Products from Selling Out
Probably the most obvious of use cases, but important nonetheless. When you’re a customer, there is nothing worse than seeing “SOLD OUT” on the product that you are ready and willing to buy online. As much of an inconvenience as it is for the customer, it is even worse for the merchant. They not only lost out on making a sale, but they have also suffered a blow to their reputation. Several times of returning to the website and seeing that same product “SOLD OUT” and that customer may never return to that merchant’s website ever again.
Forecasting demand levels and the inventory necessary to fulfill that demand reduces the risk of the above disaster occuring. However, it has to be done with a certain level of precision. Large merchants entirely avoid selling out of certain products by just intentionally overstocking. They can afford to (but shouldn’t) do this, but most SMBs and growing DTCs cannot afford this luxury.
Regardless of how big or small a business is or how much they can or can’t afford to overstock: every dollar counts! When you’re managing inventory it does not make sense to buy more than you need, because, sometimes that money can be better spent elsewhere than on warehouse shelves. Good demand forecasting means that you don’t have too much or too little inventory, you have just enough to fulfill the orders you will incur before your next shipment of fresh inventory is stocked.
2. Survive Seasonal Order Surges
Every merchant has times when demand spikes, like around Black Friday/Cyber Monday and through the rest of the holiday season. However, most merchants look at these spikes in a general sense and are not looking at demand shifts on a per product basis. Calculating seasonal demand shifts can also help merchants find opportunities to make strategic investment decisions when considering the types of inventory to invest more heavily in for the next season. For some merchants, it is scary to think that you could intentionally “understock” certain products during certain times of the year. However, that is the point of solid inventory forecasting. Accurate forecasting allows you to understock without fear, use that cash for something more pressing at that given moment, and lastly gives merchants insight into when those inventory numbers need to climb back up.
3. Know Where to Cut and Free Up Cash
As any business grows, mistakes are made. Sometimes it is a better business decision to divest from certain SKUs and invest more heavily in others. Inventory forecasting is a key piece in that puzzle that allows merchants to make these tough decisions. The reality is: every dollar counts! There are times when there are better places to spend capital than have it sitting in a warehouse, tied up into inventory that is not a great seller. But how do you know which products are worth cutting back on or cutting entirely? Inventory forecasting can tell you that!
We keep talking about redirecting capital, so let’s dive into what that really means. Inventory forecasting can tell you which products are going to be hot this season and which ones aren’t. For example, the data might suggest that it is better to cut back on stocking certain products in favor of spending that extra capital stocking up on others (and making a marketing push on those as well to maximize profitability!). To be fair, sometimes there are better places to put extra cash than back into inventory, like digital ads, paid social, sponsorships, R&D, etc. Nonetheless, at any given time SMBs have cash tied up on warehouse shelves, inventory forecasting should tell them when to tap into those reserves.
Now that we’ve covered why inventory forecasting is a NEED, let’s discuss the must-have capabilities:
Access Historical Data
There is a plethora of historical data that can be used to forecast demand and inventory. This includes, but is not limited to: sales data, visitor counts, discount usage, inventory levels, inventory lead times, and seasonal shipping delays. This data often comes from multiple sources and it can be challenging to aggregate. That is why the first step to inventory forecasting is just making sure you actually have access to the data necessary to successfully perform the task.
Advanced Forecasting Capabilities
Forecasting is easier said than done. All too often, analysts use historical data as a crutch and blanketly assume that the current trends will carry into the future. While historical data is a great base for any form of forecasting, all forecasting must be forward looking. Good forecasts recognize not just trends, but how those trends change over time.
The second key that will separate advanced forecasting from the posers is the ability to analyze cross product demand. What we mean by cross product demand is the correlation in demand for multiple products. For example, how does running a sale on “Product A” impact the demand for a highly correlated product: “Product B”. This is incredibly important and often overlooked by even the most advanced of inventory managers. Demand forecasting might look pretty easy in a static environment, but that isn’t the way the real world works. Product lineups change and sales, discounts, and promos are commonplace. All of these are factors that can not only directly impact the product in mind, but can also have a significant impact on other closely correlated products. This becomes complex when merchants consider how many SKUs they have and how many potential correlations that they must be aware of when forecasting.
Some Closing Thoughts
Inventory forecasting is hard, really hard. SMBs and growing DTC ecommerce merchants simply cannot afford to hire teams of analysts with the technical expertise necessary to do it properly and manage it on an ongoing basis. These merchants should turn to tools that they trust to help them with this process.
Pricestack is an analytics platform that enables merchants to forecast inventory, forecast demand, model demand at different prices, and more, so that you can take control of your business.
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