What Is Inventory Forecasting? (Plus How To Use It)

By Indeed Editorial Team

Published October 8, 2021

If you work with inventory or want to find a job managing inventory, it's important to know how to use inventory forecasting. Demand can change unexpectedly, and businesses often use tools to help them adjust. Learning how to use inventory forecasting may help you predict how many supplies your business needs and be better prepared for unforeseen events. In this article, we discuss what inventory forecasting is, explain why it's important, explore the different types and describe how to use it.

What is inventory forecasting?

Inventory forecasting is a system of calculations businesses use to assess how much supply they might need to meet customer demand within a time frame. These calculations depend on availability, timing and the speed of delivery. They help businesses predict how much they need to buy and sell based on past sales data, high-demand events such as promotions and supplier capacity. They also help to track sales and demand, which might help businesses prepare for demand changes, open new options for supplies and raise the amount of money they can make.

Related: How To Track Inventory

Why is inventory forecasting important?

Inventory forecasting is important because it helps businesses make informed choices about buying and selling products. Some other reasons it's important for businesses to use them include:

Improves staffing accuracy

Depending on how much inventory a business needs, they may require more or fewer employees in their warehouse. When a business has a more accurate idea of how much stock it needs, it also can plan to staff an appropriate number of people. This can save the company money on labor and equipment costs.

Improves supplier relationships

Inventory forecasting helps businesses better assess their supply needs, which can help them make informed decisions about ordering supplies. This can lead to better communications with vendors who may appreciate working with a company that understands production cycles and maintains a consistent order schedule. Improving these professional relationships also could lead to new opportunities for collaboration.

Increases sales

When a company has enough product stocked, its customers can rely on it to have what they need, which can improve customers' confidence in the company and encourage them to return. An accurate understanding of market trends can also help it sufficiently prepare for sales campaigns by adjusting sales tactics based on familiar patterns. This can help a business boost its sales by ensuring its products are always available for purchase and not sold out.

Prevents excess

Knowing how much inventory to purchase can help a business avoid buying products it doesn't need. By using inventory forecasting, it can buy only the amount it expects to sell. This could save the company money and storage space needed for unsold products.

Related: 19 Techniques To Implement for Effective Inventory Management

Inventory forecasting types

Here are the main types of inventory forecasting to choose from:

Trend forecasting

Demand for products changes over time, and companies can use these trends to predict how much they might need to stock. They look at sales history and data on growth, factoring in seasonal changes and outliers. Another aspect of trend forecasting is examining what customers are making the most purchases and adapting market strategies to widen their customer base and better appeal to preexisting ones.

Graphical forecasting

One way of using the data from trend forecasting is to apply it to a graph that shows when sales are higher or lower. A benefit of this method is that it is visual, which can make it easier for departments to see patterns and data points. Adding sloped trend lines to these graphs can help a business discover and assess new trends and lead to more accurate predictions.

Qualitative forecasting

In situations where professionals don't have enough historical data might to identify trends, companies can use customer information, such as location, age and preferences, to make predictions. To collect this information, they can use methods such as focus groups, market research and surveys. This can help them understand customers' satisfaction, needs and desired changes.

Quantitative forecasting

Quantitative data can be more accurate than qualitative research, but it depends on companies having a longer span of data collection. Rather than focusing on customer feedback, quantitative forecasting comprises numerical data, such as price changes over time that are correlated with demand changes within that same period. A benefit of this is it uses preexisting data, which may save the company time and resources on research.

Related: The 4 Types of Forecasting Models With Examples

Factors to consider when selecting an inventory forecasting strategy

Inventory forecasting strategies can produce varied results for different businesses. To choose the right one, businesses consider factors like:

  • Age of business: A younger business might benefit more from qualitative forecasting strategies, such as focus groups, so they can establish starting information to make up for a lack of historical data. When applicable, a combination of forecasting strategies can help a business produce the best results.

  • Product: Certain products may have different patterns of demand from others. For example, food staples like bread might have a fairly fixed demand, while demand for a product like air conditioners has a fairly trackable, but still inconsistent, pattern.

  • Customer base: Different customer demographics have their own preferences and buying trends. For example, a business in a rural setting may have different seasonal demands than one in an urban setting, and keeping these factors in mind can help businesses choose the right strategies and improve their accuracy.

Related: Inventory: Definition and Methods for Management

How to use inventory forecasting

Here are some basic steps to help you learn how to use inventory forecasting:

  1. Set a time in which to forecast inventory needs, such as a month or a quarter.

  2. Look at the base demand in a past period of the same length and use that number as the new base demand.

  3. Determine which trends and significant factors might cause sales to increase or decrease.

  4. Examine the speed at which products are selling.

  5. Review marketing activity, seasonal factors and relevant changes in the industry.

  6. Create models based on all of this information, accounting for outliers and areas of unknown data.

  7. Adapt the models for each forecasting period, factoring in seasonal changes and other timely aspects.

Explore more articles