The Advantage of Demand Forecasting in Inventory Management

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Operating a business today is like walking a tightrope. Especially for online merchants, there is no such thing as a “small mistake”, for perfectly balanced steps let you reach that far-off goal of commercial success, while, with one tiny mistake, you could tumble into obsolescence or the pit of financial ruin.   

In this case, making informed decisions is absolutely crucial. However, nothing is set in stone. Accurate forecasting gives you a good sign of things to come. Predicting the consequences of unexpected demand fluctuations is a common challenge in this ever-evolving landscape.

Like a captain navigating unpredictable seas, online merchants must keep a vigilant eye on their supply chains and inventory levels. The online marketplace is your playground, and you must be ready to adapt to sudden shifts in demand. Whether it’s affected by the seasons or Mother Nature herself, you must be prepared with reliable backup plans. Even with unpredictable disruptions in the market, your customers will always be looking to score good deals. eCommerce success isn’t built on exploiting seasonal proclivities but on resilience, resourcefulness, and adaptability.

Understanding and predicting consumer demand is making informed assessments. It applies to supply chain, profit margins, cash flow, capital expenditures, capacity planning, and other factors. Often, but not always, by looking at historical data, demand forecasting assists organizations in estimating the total sales and revenue in the future. 

Almost all decision-makers should use the demand forecasting methodology to prevent overproduction and underproduction. Analysts must decide what they are measuring and the time perspective. They will then need to choose a type and demand forecasting method. Then, gather, evaluate, and interpret results for a systematic and scientific demand prediction.

Using historical sales data to predict future consumer demand is only one aspect of sales forecasting. Qualitative and quantitative forecasting employs many sources and data sets to infer valuable sales data. It can be divided under the forecasting process.

When there is historical data on specific products and a pre-established demand, the quantitative forecasting method—passive demand forecasting—is used. Mathematical formulas and data sets, like financial reports, sales, revenue numbers, and website analytics, are needed for passive demand forecasting.

On the other hand, the qualitative approach, or active demand forecasting, depends on cutting-edge technologies (such as machine learning). It also includes adjustments in pricing and availability. Tracking product lifecycles and product upgrades is essential to understand future trends better. Because the qualitative approach is more “subjective,” trust the judgment and experience of the people creating the forecast.

importance of demand forecasting

How to use demand forecasting to grow your eCommerce business (sellerapp.com)

Demand forecasting is essential as it enables businesses to anticipate client needs and make informed plans. Demand forecasting planning also assists online merchants in setting prices and adjusting marketing and sales activities. Ditto, it can help in planning production and inventory management.

This further enables businesses to satisfy customer demand successfully and proactively manage short- and long-term goals. With accurate forecasting, eCommerce businesses can reduce the expenses of overstocking or understocking. The result? It’ll reduce lost revenues from stock-outs. It even helps guarantee that client orders are met on time.

Understanding the 4 Factors that Affect Demand Forecasting

Demand forecasting is no longer a method only done by large enterprises. Businesses of all sizes can gain access to customized data and analytics to make better business decisions. This can be achieved by working with a tech-focused third-party logistics provider or on-demand warehousing partner.

Sales, marketing, and supply chain management come together in demand forecasting. To succeed, all these parties must work together. Learn how various forces impact demand predictions.

1. Your Competition

Competition impacts demand since customers now have more options, and other businesses compete for their attention.

Demand will get skewed when a competing force enters the picture. That could be a direct rival or a novel product/solution compelling your client to pick between you and them. An agile demand forecasting model can help you respond quickly to sudden demand shifts.

 2. Types of Products

Demand forecasting will vary for goods and services, such as perishable items and subscription boxes that arrive simultaneously.

It’s essential to understand the lifetime value of your customers to improve demand forecasting. It would be best to track all the purchases over time across your channels, their average order value (how much they spend each time), and their product combinations.

With this information, you can group or bundle products, increase recurring income, and determine how the demand for one SKU influences or drives desire for another.

 3. Geography

Inventory forecasting and order fulfillment times can be significantly impacted by the geography of your customers’ homes. You’ll also need to consider the locations from where you manufacture and transport orders.

Your retail supply chain’s geographical locations can be strategically important.  You can rapidly and more affordably meet customer demand by using fulfillment centers in areas closest to your customers. 

It’ll let you track where your consumers live and store specific products near where they frequently order. This saves you from shipping them to remote locations. The less transportation required to deliver products, the lesser the costs, the bigger your margins will be.

4. Seasonality

Seasonality describes variations in order volume over a predetermined period. A seasonal brand may target a particular time, occasion, or season, resulting in fluctuating demand levels year-round. Take note of significant increases during their peak season, for example, turkey sales right before Thanksgiving.

Demand Forecasting Best Practices

eCommerce businesses should consider demand forecasting since it allows them to plan for anticipated demand levels for goods or services. These forecasts don’t need to be perfect up to the last digit to be helpful. Even directionally accurate forecasts can help as they give businesses enough time to adjust. Every bit of data allows, whether it’s tightening budgets, adding more manufacturing capacity, or sticking with what sells. 

problems of inventory management

20 Inventory Management Statistics You Should Know in 2023 (myos.com)

Effective demand forecasting is a crucial component of effective inventory management. Insufficient inventory leads to unhappy consumers and potentially less profits. The worst part is that if it happens frequently enough, especially for clients, they may stop doing business with you. Overstocking is expensive in terms of storage and transportation. Not being able to sell your inventory could cost you your entire investment. So, a solid demand forecast must include establishing the proper inventory balance.

Demand forecasting is essential for growing businesses, especially small and midsize ones. Businesses of stable size and sales don’t face the same risks and variation in outcomes that a quickly growing company goes through. Mistakes in forecasting are more easily absorbed by a larger enterprise than a small one. Improper scaling is a major cause of failure among startups, and flawed demand forecasting can lead to just that. It can be problematic to not adequately prepare to fill a big order or scale too rapidly to meet demand that never arrives.

Either way, a bad forecast can eat up a company’s runway  — the period it can operate before running out of money  — by burning the cash it needs to survive.

1. Get Quality Data

It’s an absolute must to have the appropriate type of data to make wise business decisions for a successful demand forecast. Focus on the statistics that provide you with information to make decisions. These could be price patterns, the volume of visitors to your sales channels during a specific period, and more. 

Try not to focus your data collection efforts on your entire product line. Concentrate on the products and categories that net you more profits and what’s popular with customers. 

2. Take Variables into Account

The daily interactions that affect sales statistics involve many variables. For more accurate demand forecasts, consider factors that could skew your data, such as unforeseen store closings or the weather. This is important if the product is trendy or seasonal because forecasting future or intermittent demand may be more challenging.

3. Track All Sales and Demand Trends

You’ll need a repeatable data analysis process for any demand forecasting metric. The data has to show whether the forecast is improving or deteriorating. Tracking your sales identifies the areas that require the most improvement. Understanding data can help assess accuracy at the time of procurement. An inventory management tool helps provide accurate data by customer, branch, brand, product, and category.

4. Allocate and Spend Your Money Wisely

Once you’ve gathered enough data to formulate a plan, what’s left is determining how to budget for your actions. Once your demand forecast is in place, you’ll know how, where, and when to distribute your resources and purchase efforts. 

Demand forecasting helps online merchants make more informed decisions about production planning, inventory management, and supply chain operations. Advanced tracking solutions provide crucial information about future customer demand.

Proper forecasting aids in planning for future capacity, capital expenditures, cash flow, profit margins, and more. An eCommerce business will succeed with demand planning based on sales data, market analysis, and economic variables.

Aratum offers a complete software ecosystem designed to assist with your demand forecasting and inventory management. Connect all your operational systems and operations under one digital dashboard. Minta demo to find out how you can optimize your eCommerce processes.

*Stock image was sourced from Unsplash

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