5 Steps To Optimise Your Inventory: Step 4 - How To Calculate Your Product Forecast

The fourth step in the article series focusing on Inventory Optimisation and the most important step in your inventory optimisation program highlights the need to calculate your product forecast.

Calculating your product forecast is the most critical part of inventory optimisation. Get it wrong, and you either overstock or understock, both of which can be very damaging to the business.

Forecasting is the basis of setting warehouse stock levels. Forecasts have to be as accurate as possible, which is why software is required that immediately reacts when there are changes to trends or seasonality.

There are two main forecasting policies - statistical and demand - and both are important for different reasons.

Statistical forecasting looks at longer term trends, and is controlled by rules and methods. This means it has the great advantage of being calculated more or less automatically.

Demand planning is influenced by short term changes in the market and capacity. It is more manual and reflects many more influences, such as marketing activities, new demand for new products, new markets and so on.

A statistical forecasting system looks for repeatable demand patterns that occur at the same time each year. You will therefore need at least a 12-month demand history to carry out statistical forecasting and detect trends and seasonal profiles. It is important to focus on order history and not shipping history, as the two can be very different. Using this information, statistical forecasting can determine trends and likely future demand, such as if demand for a specific product is going up or down over a longer period of time.

While statistical forecasting calculations might be done automatically, they can be less accurate if there are zeros in the demand history or if the demand history is highly irregular. For instance, statistical forecasting does not take into consideration the fluctuations caused by specific sales and marketing activities, which are key drivers in the demand planning numbers.

Demand planning is preferred for short term forecasts. Demand is when a customer buys your products and services, and it is your sales and marketing activities that normally makes them do this. Sales and marketing activities drive the forecast or demand plan numbers; it is not the other way around. So you will need to ensure that information on sales budgets, promotions and campaigns are included in your calculations.

This method also needs to take into account eventual capacity constraints and potential shortages. This means that you can purchase or produce certain items and place them in stock in advance of orders so you can deliver the final product during a high peak season.

Get your forecasts right, and you will never be over or understocked, your customer service levels will go up, and your warehouse efficiency will be optimised.

Of course, while forecasts are vital, you still have to put the products on the shelf. Which means there is one step left in your inventory optimisation program, and that is replenishment - making your relations with suppliers run as smoothly as possible.