An accurate demand forecast is essential for good inventory management so it is vital that business owners get it right. In this article, we explain why demand forecasting is so important, and provide a few tips and tricks on how to get it right.
Back to the basics
Demand forecasting is the process of using analytics to predict future sales trends in order to manage inventory successfully. This is an essential task for any business, big or small, as it can help you to capitalise on demand wherever and whenever it increases. Keep reading to learn more about why demand forecasting is so important.
Meeting customer expectations for product availability is a vital function of demand forecasting. Underestimating or failing to provide the necessary amount of inventory your customers want puts you at risk of losing them to your competitors, who may be able to deliver what you lack. This means that inaccurate predictions of demand not only put you at risk of disappointing new customers, but it also puts you at risk of losing previously loyal customers by consistently failing to deliver.
This is where accurate forecasting of demand comes in; using the right tools and information, you can ensure that when it comes to ordering inventory, you know exactly which products to stock up on. This will ensure that customers can rely on you to meet their expectations, improving your reputation in consumers’ eyes and generally increasing sales.
Preventing obsolete stock
By the same token, accurate demand forecasting can help you to prevent resource wastage such as excess or obsolete stock. Excess stock happens when inventory is ordered but not sold – for whatever reason – leading to financial wastage. Find out how to rid your business of excess stock.
The reasons why certain items become unpopular are varied, including everything from trends to weather. Your business needs to work around these and align your inventory to suit. By forecasting demand accurately, you can mitigate the risk of ordering large amounts of unpopular products which have lost favour with your customer base.
By looking at historical sales data and trends as part of a comprehensive demand forecasting plan, inventory managers can look at what has worked in the past and repeat it where appropriate. For instance, you may find that the previous summer sale brought in a lot of new customers and hence an increase in sales. In this situation, you can use this information to repeat the sale in the future, hopefully leading to another round of sales increases and more customer engagement.
Better cash flow
Accurate demand forecasting can have a dramatic impact on your use of working capital and the preservation of your cash flow. If for instance, you order too much inventory which does not align with current demand, you are spending cash that could be put to better use until demand picks up. In this situation, your cash is tied up paying for inventory that sits in a storage room gathering dust. Having money tied up in excess stock like this can stress your company’s ability to make debt repayments, and inhibits your investments in growth and development.