Online shopping is a $700 billion-plus industry. With more Americans shopping online than ever before, eCommerce companies are feeling the pressure to respond to demand. This makes understanding how to do inventory forecasting a growing need for many companies.
However, managing seasonal spikes and everyday supply and demand can be stressful. That’s why this blog will explore everything from demand forecasting and inventory control to safety stock calculations and popular forecasting methods.
Why eCommerce Inventory Forecasting Matters
Maintaining the right amount of inventory is a difficult task and it’s not something you can accomplish by giving it your best guess. As an eCommerce business, failing to maintain the delicate balance between supply and demand can lead to a few downfalls.
First, you either end up carrying too much inventory and spending too much money, or second, you fail to deliver your product to customers on time, resulting in consumer frustration and lost sales.
Understanding how to do inventory forecasting matters because it’s the difference between building brand loyalty / moving inventory and losing customers. It’s also the difference between overpaying when business is slow and under-delivering when busy seasons like Christmas and Hanukkah or even Small Business Saturday come around.
The Benefits of eCommerce Inventory Forecasting
Inventory control is good for staying one step ahead of consumer demand, but it’s important to take a deeper look at how it can positively impact your business.
Minimize Stockouts
A stockout occurs when you haven’t accurately stocked your inventory to keep pace with demand. By accurately predicting future demand (based on previous recurring trends), you can avoid stockouts so you’re prepared when customers come knocking.
Reduce Inventory Costs
Understanding when you need to stock certain products and generally how much you’ll need to order is important. By doing so, you can cut some of the costs that accompany storing large amounts of inventory in a warehouse.
Reduce Product Waste
Depending on what your business offers, you may end up wasting money on spoiled products if they’re left to sit for long periods. Understanding forecasting analysis to optimize inventory helps cut back on waste, which is good for both your business and the environment.
A Pricing Strategy that Reflects Demand
Understanding the demand for a particular product is a key factor when pricing that item. You can charge more (and sometimes have to) for in-demand products. By understanding eCommerce inventory forecasting, you can appropriately tweak your pricing to match the demand for that product.
Understanding What Affects Demand
Whether it’s an industry’s busy season or not, several variables can affect customer demand. These can include any of the following:
- Location. One of the main benefits of an eCommerce store is that it can easily reach an international audience. But that doesn’t mean your business or the products you have to offer will be right for everyone. People from different countries and cultures have different priorities and expectations, which will affect how popular your product or service is in any given market. It will also dictate how much that market is willing to pay for it.
- Seasonality. Holidays are a major factor that can affect supply and demand. With online Black Friday shopping and promotions like Cyber Monday, any eCommerce business needs to make sure it’s stocked for these somewhat predictable spikes.
- Types of products. The types of products you offer can dictate how frequent demand is. For instance, luxury items like niche handbags won’t receive many return customers in the way that health supplements will. This means the former may see a spike in demand around the holidays, whereas items like subscription boxes or everyday household items are likely to see a more steady sales stream.
- Competition. If new competition is moving into your space or a current competitor is running a special promotion, you might see sales siphon off for a time. This is another reason why understanding how to do inventory forecasting is vital, as an “out of stock” label could lead customers to find a new source amidst a competitive market. You’ll find more on this below when we discuss safety stock calculations.
Types of Demand Forecasting
Now that we’ve covered some of the variables that can cause an ebb and flow in demand, it’s important to understand the different types of demand forecasting and how different types of forecasting methods can help you with inventory control.
Short-Term
Short-term forecasting, which typically refers to predictions in sales trends in the next 3-12 months, is often used to learn about seasonality. Short-term eCommerce inventory forecasting is helpful for holiday planning and can help you make an educated projection for coming seasonal spikes.
Long-Term
This forecasting method takes a look at demand patterns over the next 12, 24, or even 48 months. While less relevant for seasonal spikes, long-term forecasting is highly beneficial for understanding the demand for particular products. In this way, it can be used to track recurring seasonal demand, something that can either validate or reveal holes in your short-term forecasting methods.
Macro-Level
This type of forecasting takes a look at your industry and frames forecasting in the broadest possible context. This is useful for companies looking to branch out into different types of products that need to acquire a baseline understanding of supply and demand. Macro-level forecasting is helpful because of its ability to assist in determining inventory planning and supply chain management.
Micro-Level
As the name suggests, this is the opposite of macro-level forecasting. Micro-level forecasting drills down into your previous performance history. This includes components like:
- Past sales performance
- Profit margins
- Cost of production and cash flow that could impact inventory planning
How to Perform Demand Forecasting
If you under-forecast volume, you won’t have enough supply to keep up with demand. You’ll also likely be short on employees to fulfill orders, especially if you rely on seasonal workers.
If you over-forecast volume, you may end up spending a lot of money on inventory just so it can sit in a warehouse.
To begin demand forecasting, you’ll want to start with the following:
- Set objectives. The clear purpose of forecasting is to determine what, how much, and when customers will purchase specific products. To start, choose the date and specific product or category, then determine whether you’re forecasting demand for everyone or a certain demographic.
- Collect and record data. It’s helpful to gather the data from your sales channels and take a look at the time and date of orders and SKU(s) ordered to help you understand trend projection. It’s also important to pay attention to eCommerce returns. Does a certain product have a high return rate? Assessing data on a granular level can also help you understand potential weaknesses in your current procedures, like a lack of attention to order picking accuracy in the case of high return rates.
- Measure and analyze data. No forecast will be perfect from the start, which is why it’s important to analyze data and compare it to your original forecast. This will help you better adapt your next forecast as needed.
- Budget accordingly. Once you’ve measured concrete data against your initial projections, you can better plan your next forecast and more accurately update your budget to match educated sales projections.
Safety Stock Calculation and Reorder Point Formula
The reorder point is simply the level of stock at which you should reorder more products to avoid stockouts. The reorder point formula helps with the following scenario:
After reordering your stock and selling the most you’ve ever sold every day, how much stock will you need to avoid running out until your next order arrives?
Essentially, the reorder point formula helps you create a safety buffer of inventory without blindly purchasing more than you’ll realistically be able to sell. The safety stock calculation formula works in tandem with the reorder point formula.
Before calculating your reorder point formula, you need to know your safety stock. The formula for this is:
Safety Stock = (maximum daily sales x maximum lead time in days) – (average daily sales x average lead time in days)
Now, let’s say you were an eCommerce business that offers health supplements. Calculating your safety stock could look something like the following:
Safety Stock = (15 bottles x 5 days) – (11 bottles x 3 days)
Safety Stock = 42 bottles of health supplements
Now that you know the safety stock and lead time demand, you can use the reorder point formula to determine your buffer:
Reorder Point = (Average daily usage x average lead time in days) + safety stock
Reorder Point = (11 bottles used x 3 days lead time) + 42 bottles
Reorder Point = 75 bottles
With this calculation, you’ll know that you need to place a new order with your supplier when you have 53 bottles left in stock.
Inventory Forecasting and Your Business
In short, understanding how to do inventory forecasting is about making and maintaining as much revenue as possible and avoiding pitfalls like stockouts, product waste, and lost customers.
Taking the time upfront to focus on creating a forecasting analysis to optimize inventory can feel tedious. But it will save you a lot of time and anxiety over the holidays when business — and stress levels — tend to pick up.
Managing the ins and outs of an eCommerce business is difficult, especially during busy seasons. If you’re looking to enhance inventory control and partner with a 3PL that understands how to do inventory forecasting, contact us to learn more about our eCommerce fulfillment services.
