How do you calculate inventory forecasting?

Dec 19

By making strategic plans for the future, your company can be prepared for market changes. Getting the most out of business forecasting requires targeting your approach and tweaking it to meet the needs of your business.

What is Forecasting?

Based on previous data results, forecasting is the art of predicting the future. It is essential to analyze past and present trends to predict future events. Because it uses statistical techniques and tools, it is also called statistical analysis. Therefore, forecasting acts as a planning tool that provides enterprises with a way to improve their preparedness for future uncertainty. This begins with the sharing of experience by management. Organizations should learn about the nuances of the different forecasting methods to maximize the benefit from forecasts. In addition, determine the forecasting method suitable for your needs, and know what kind of forecasting must be avoided. In addition, forecasting has many advantages, including:

We are using resources more efficiently.
Making a business plan
Management quality must be improved.
Contributes to the establishment of a new business model
Making the best decisions for the company

Importance of Forecasting

Operating requires a lot of labor forecasting, material forecasting, and resource forecasting. In the case of better forecasting of services, a balanced workload sheet can be planned appropriately. The following are a few ways forecasting has helped:

It gives reliable information about the present and past trends and forecasts for the future so that planning can be improved.
We are providing alerts to deal with future challenges.
Ensures that production facilities are used effectively.
Customers are provided with better services.
Capital and resources are more efficiently utilized.

What is inventory forecasting

Forecasting inventory levels is estimating inventory levels for a future period. Using it also allows you to manage your purchase orders more effectively by monitoring sales and demand. This inventory management tool can maximize your revenue and reduce unnecessary expenses.

Here are some benefits to inventory forecasting for your business:

Ensures minimalstockoutss

You can avoid stockouts and lose sales revenue when you predict future demand accurately. You can use this information to determine how many units to order and when to restock.

Reduces the cost associated with inventory holding

It helps you manage overall inventory, as you only order what you need rather than calling too much. It also helps with inventory storage space management, as you only store what you need. As a result, the amount of unwanted storage space is reduced and the associated costs.

Reduces product waste

Inventory forecasting forces a company to figure out which items aren't selling or are selling slower. These items can be repurposed or bundled with better-selling items. If this is the case, warehouse space can be freed up, and revenue can be increased.

Inventory Forecasting Formula

A forecasting model predicts inventory levels by considering sales history and trends, average lead times, demand, reorder points, and safety stocks.

We must apply the following formula to the forecasting of inventory:

Calculate the demand for lead time
Monitor trends in sales
Determine the reorder point
Determine the safety stock

Calculating the need for lead time

Keeping track of lead times is crucial. It is essential to predict the product demand during the lead time so that your vendor can fulfill your order. Otherwise, you may run out of stock on items while waiting for new ones.

Lead time demand = average lead time in days x average daily sales.

You can calculate the average lead time from the time it has taken your vendor in the past to deliver the product. Typical lead time in days is multiplied by average daily sales to determine average lead time demand. The average number of units sold can be calculated from previous sales data by summing the average daily product sales.

The measurement of sales trends

Generally, sales trends are defined as increases or decreases in sales over time; the products to be analyzed over a reasonable period can be specified by businesses. A micro-trend and a macro trend are classified as sales trends; macro trends examine a broad range of products over a more extended period instead of micro-trends, which focus on a specific product. You can always avoid stockouts by knowing the market conditions and what your customers are buying so that you don't run out of popular or fast-selling products.

Setting the reorder point.

A reorder-point (ROP) is a specific level at which you need to restock your stock, so you don't run out of a product; it allows you to place an order when you need to. A reorder point that is fixed isn't helpful when you're forecasting. Forecasted sales trends should be used to determine the reorder points during each sales season.

Multiply your average daily sales by the lead time and add the result to safety stock to calculate the ROP.

ROP = (average daily sales x lead time) + safety stock.

Calculating safety stock

Stock safety is the additional amount of a product kept in the Warehouse in case of a stock out. Consequently, safety stock serves as a hedge against unpredictable demands. There are several benefits to this: Insufficient safety stock leads to lost sales, while excess safety stock leads to higher holding costs.

Your shipping costs are reduced because vendors do not need to expedite delivery. Additionally, stocking up on customer orders increases sales revenue.
Stocking up on safety stock allows you to wait until the next order arrives.

Calculating the optimal amount of safety stock for your business is easy using the following formula:

Safety stock = (maximum daily sales x full lead time in days) – (average daily sales x average lead time in days)

Safety stock is calculated by multiplying maximum daily usage (that is, the maximum number of products sold on a single day) with the total lead time (which is the longest time the vendor takes to deliver the product), then subtracting it from the multiplication sum of the average daily sale of products (which is the average number of products sold in a day) and average lead time (which is the average time taken by the vendor to deliver the products at Warehouse).

Conclusion

A good inventory forecast can help you take your business to the next level since it optimizes your inventory. A good inventory forecast can be accomplished with inventory management software. Checkout Inventooly if you need an inventory forecast management tool for your business.

Besides forecasting, inventooly ensures accuracy, efficiency, and completeness. This software helps strike the right balance between too much and too little stock. You can get insights into your inventory and manage your supply chain using inventory management software. It is easy to use.