Importance of Inventory Forecasting

Marcy Lynn Holmes
Sep 3, 2018 · 7 min read

Any company that sells tangible goods needs to have a strong inventory forecasting strategy. Inventory Forecasting is the act of planning ahead to have reliable predictions of your inventory levels for both the immediate future and in the long-run. Without dependable inventory forecasting, there are many problems that can arise, and in today’s business world, organizations cannot afford to fall behind their competition. These are some of the problems that can be alleviated by inventory forecasting.

via Unsplash

Inventory Shortage

If a company experiences an unexpected spike in sales of a particular good, they may find themselves running out of stock before they can meet the demand of their customers. This will lead to angry customers who may switch brand loyalty or demand lowered costs and refunds. Rush orders can be placed, but they are expensive and cut deeply into profit margins — that’s not an option for business who rely on volume. While it is impossible to predict the future, inventory forecasting can help a company to be prepared for these types of situations by analyzing past trends and applying them to future expectations.

A strong inventory forecasting strategy will help companies to avoid shortages by applying these past trends to their present and future sales and orders. When these shortages are avoided, the proper amount of inventory will be available to fulfill orders as they come in, saving the company money on rush manufacturing and expedited shipping. If, historically, a certain product has sold in higher numbers during certain months of the year, inventory forecasting can help a company to plan for this and have more product and materials ready to meet that increased demand.

Inventory Surplus

It may seem like the best way to prevent a shortage is simply to have far more supply on hand than is required. This, however, is not a sound business decision and can lead to other problems. Storage is expensive, and if a product sits in a warehouse for an extended period of time without moving, it is essentially wasted money for the company.

via Unsplash

Inventory forecasting helps a company to plan for the amount of product that will be on hand and to manage these numbers efficiently. By having a good idea how much they can expect to sell, they can order just enough so that they don’t have excess product sitting on their shelves and increasing their costs. This can be achieved through analysis of seasonal trends and paying attention to the overall market for the industry.

Perishable goods can only be stored for a certain period of time, so over lproducing them would lead to spoilage and even more money down the drain. This is not to mention the labor costs that are inherent in storage and movement of these items. Forecasting can help companies to keep their warehouses at optimal levels so that they don’t rack up charges due to inventory overages. When a company has a firm grasp on how many perishable items they can expect to sell in the coming months, they can take the proper steps in ensuring that they will minimize any losses due to spoilage.

Delayed Deliveries

Forecasting doesn’t only benefit inventory levels — by proxy it helps to streamline the delivery and shipping process. If a warehouse is overloaded with goods, it may take longer to load or unload freight on the trucks that are moving it. When inventory has been forecasted accurately, this process can be made more efficient and the goods can be moving faster than expected. By reducing the need to produce rush orders, there is less driver waiting time for manufacturing and more time on the road, making deliveries on time and keeping customers happy.

“top view of truck trailers on junkyard” by Mincho Kavaldzhiev on Unsplash

Forecasting also helps warehouses to make the right decisions when it comes to employing workers and scheduling their hours. A mismanaged warehouse may not have a sufficient number of workers to load a truck or assemble a product line at the final hour when an urgent shipment comes up. However, a warehouse that practices inventory forecasting will know just how many employees they need on site in order to get their shipments moving in line with their customer’s schedule.

This also helps in scheduling pickups and deliveries. When a warehouse has a clear image of how many shipments they will have over the next week, they can line up trucks ahead of time. This prevents them from needing to pay premium rates for last minute, expedited shipping, and helps them schedule loading times to better avoid detention charges that accrue when a product is not prepared for shipping.

Production Scheduling

This goes hand in hand with the improvement in delivery times. Because trucks will be lined up ahead of time, the warehouse will know how much time they have to make a particular product. The team will be able to work together to minimize inefficiencies and have the right product lines ready for shipping when the time comes to send them out.

Inventory forecasting allows multiple warehouses to communicate more effectively, coordinating their timing to maintain stronger production practices. One warehouse may specialize in a certain part that must be finished before the next step in production takes place. They can use inventory forecasting to schedule their production and do this in conjunction with the next warehouse so that everyone is prepared for the final step.

Obsolete Inventory

Many companies have products that they know are going to become obsolete at some point in the future. If they have an overload of inventory on hand when the product is no longer selling, then they will have to take the loss of funds on the obsolete goods. Forecasting can help identify which products are going to become obsolete by staying on top of current sales trends and keeping up demand of these items. By slowly working to eliminate them, inventory forecasting helps companies save money on obsolescence costs.

Forecasting doesn’t just mean slowing down production of these obsolete products. When an organization notices that a product needs to be phased out, they can make pricing decisions on the material that is already on the market. They may decide to put certain items on clearance, lowering the prices to encourage deal-hungry buyers to purchase the item at a reduced rate. This may cut profits down a bit, but it is better than taking a total loss on the item when it reaches complete obsolescence.

Stronger Relationships with Vendors

Vendors appreciate when they benefit from a steady, well-maintained schedule of production and deliveries. If a company is constantly in need of last-minute rush shipments, they put a lot of stress on their vendors and suppliers. This can hurt the productivity and profit levels of the vendor, requiring them to neglect other, more organized customers in favor of the warehouse that is managed poorly.

“assorted chip pack lot” by Jelleke Vanooteghem on Unsplash

In many cases, this can lead to a vendor firing the customer or refusing to do business with them. This can be easily prevented by having a stronger inventory forecasting program in place. With consistent, reliable shipments, a vendor may even offer discounts as a reward for being a pain-free shipping partner. Everybody wants to please their customers, but there are times when suppliers feel that it is not worth it to bend over backwards in order to meet the demands of a company that shows no regard for their processes.

Improved Sales Forecasting

Inventory forecasting isn’t limited to the physical aspects of the product. It can also help with revenue and profit forecasting so that the sales team can set expectations and make decisions based on thorough analysis. This can help sales reps to focus on specific products based on variables such as seasonality, market trends, and holidays.

Using past trends, sales reps can also determine the best times to offer promotional pricing and push a more aggressive marketing campaign. When the sales team and the warehouse work together, they can create a more cohesive, effective sales strategy that will make the company more profitable in the long run. This will make the company busier in all aspects, and they will benefit from the efficiency that comes along with inventory forecasting.

Increased Customer Satisfaction

All of these things together make for the most important part of doing business — happy customers. The fewer problems that customers have to hear about or compensate for during the manufacturing process, the happier they will be. It is not the customer’s responsibility to make up for missed production schedules or late deliveries. That burden lies solely on the shoulders of the manufacturer, and they must do everything they can do minimize these problems.

Inventory forecasting is one of the most important parts of keeping customers coming back. When they can rely on a consistent schedule and sufficient amount of stock, they will be happy to work with their provider. The key to maintaining these levels is to put a strong inventory management software like EMERGE App in place. Employees will be more efficient and customers will benefit from a dependable, satisfactory relationship.

Small Business Digest

This is a collections of my musings on business strategies, ocassional business tips and advice.

Marcy Lynn Holmes

Written by

Aspiring writer and entrepreneur based in Grand Rapids, Michigan.

Small Business Digest

This is a collections of my musings on business strategies, ocassional business tips and advice.

Welcome to a place where words matter. On Medium, smart voices and original ideas take center stage - with no ads in sight. Watch
Follow all the topics you care about, and we’ll deliver the best stories for you to your homepage and inbox. Explore
Get unlimited access to the best stories on Medium — and support writers while you’re at it. Just $5/month. Upgrade