How Small Retailers Can Forecast Demand For Better Inventory Management

Forecasting product demand is often discussed in the context of how it is employed in a distribution or wholesaling capacity. It can be just as valuable to the independent retailer. In fact, without a proper forecast that details which products customers will buy, in what quantities, and when, local merchants cannot effectively manage their inventories. As a result, they'll find themselves running out of stock - which leads to lower profits and customer complaints - or forced to unload excess inventory through costly markdowns.

Accurately forecasting demand prevents those types of situations from happening. Below, I'll describe why it is so important for small retailers to forecast and how past sales trends play a key role. I'll also explain the importance of identifying each product's sales velocity.

Demand Forecasting Guides Everything Else

Stocking a given level of inventory requires that the independent merchant knows how much he or she can expect to sell of each product. Otherwise, there is a high likelihood that limited resources are being used inefficiently. For example, resources may be allocated elsewhere when they should be used to increase product inventories. Or, they are tied up needlessly in excess supply that will not sell - or must be abandoned at markdown prices.

By estimating the year-round demand for an item, small retailers can plan how much to purchase and when to replenish their stock. For seasonal items, local merchants can reduce their stock and direct their limited resources toward items that will generate more profit. The more accurate their forecast, the less likelihood that they'll be in an out-of-stock or excess stock situation.

Analyzing Past Sales Trends

All product demand forecasts are based largely upon past sales trends. Small retailers must regularly analyze their sales data to identify peaks and valleys in volume. They should pay particular attention to times when they have run out of stock in the past. They should also note times when they were forced to close out excess inventory through markdowns. By analyzing past trends, independent shop owners can plan product replenishments to avoid running out of certain items or tying up resources needlessly.

Sales Velocity From A Small Retailer's Perspective

Sales velocity describes the rate at which a product sells; it is a core element for making effective inventory management decisions. For example, consider an item that is only purchased twice a year, but in large quantities. The item's sales volume is an important factor for deciding how much to stock. However, it only describes one side of the story.

Suppose a smaller quantity of that same item sells every week. Let's further suppose the weekly quantity sold adds up to the same annual volume as in the previous scenario. The product's velocity tells a critical piece of the story and should factor into a small retailer's inventory management decisions. Knowing each item's velocity can help a small shop owner avoid overstock and out-of-stock situations throughout the year. What's more, he or she can allocate their resources more efficiently rather than tying them up in costly inventory.

The Value Of Ongoing Forecasting Updates

Product demand changes as customers' needs and desires change. Independent merchants should not merely forecast demand at the beginning of each year expecting their forecasts to remain accurate. Ideally, they should use software that compiles sales data continuously for them. That allows them to keep on top of changes in demand as customers' tastes and needs evolve. In doing so, they'll avoid making poor inventory management decisions that lead to out-of-stock circumstances or costly markdowns.

Forecasting is not a simple science, even given the limited inventories that independent merchants typically carry. However, it is one of the keys to achieving an optimal return on your inventory.