Running a successful product-based business involves a complete understanding of the supply chain.

Inventory forecasting is an essential practice for companies that sell physical goods because this gives them a clear perspective of which products need to be in stock at which point in the calendar year.

In today’s post, we are going to discuss two specific methods of inventory forecasting and how you can implement them within your business.

1. Inventory Forecasting for “Made to Order” Businesses

Many different companies, such as clothing brands or furniture makers, take take pre-orders for products that they have not produced yet, also known as “Made to Order.

This is extremely common in the fashion world where many orders take place that aren’t meant for delivery until one or two seasons later. This process gives clothing brands the time they need to create sufficient quantities of their most requested pieces.

The hard part is keeping track of all of these orders and their future ship dates (also know as the “Start Ship Date”). For example, some buyers will ask for the order items to be delivered in June while other buyers will request an August delivery date. By not having a clear understanding of which items need to be fulfilled by which date, errors such as missed ship dates, over production, or inefficient production practices can easily occur.

Luckily, this can easily be solved if you take the following three steps:

1. Capture orders as “Sales Orders” in your system and not as invoices
2. Record a “Start Ship Date” for every order you capture
3. Implement an inventory management system that has an inventory forecasting function

As such, it’s extremely important to find order & inventory management software that provides this inventory forecasting functionality with a clear breakdown of which products have been ordered (by month) for the next 12 months and when they require shipment.

Systems like these are critical for small businesses to run effectively. They eliminate hours of work sorting through orders and tallying up items in an excel sheet.

2. Inventory Forecasting for “Made to Stock” Businesses

Some companies take a different approach to production & management and pre-produce products before they start selling, also known as “Made to Stock”. These companies are able to receive large quantity orders and fulfill them in the same day.

Small businesses that take this approach make the investment to have a healthy inventory beforehand so that they can fulfill orders as quickly as possible.

This is beneficial for two key reasons:

1. Vendor reliability and greater order frequency. Inventory is king and retail real-estate is limited. If you are a reliable vendor that always has products in stock, you will get better in-store real estate and most likely get orders on a more consistent basis than others.

2. Time is limited and if you are getting orders on a seasonal basis, you will be getting a maximum of four orders from each reseller per year. Compare that to a company with items in stock year round who can get a much higher number of orders during the same time period (resulting in more revenue).

To properly forecast the needed inventory for future months or future years, it is best to have a system in place where you can break down the number of items ordered, by month.

From this breakdown, you can use statistical forecasting to project the number of items that should be produced at any given period of time.

For example, if you saw a 20% increase in sales for “Item ABC” from the month of September to October, it is possible to say that there will 20% increase in November. It should be noted that this process is very difficult and can differ for different companies due to a number of factors such as seasonality, weather, or other unforeseen events.

Once again, when you start to see traction in your business and are looking to upgrade from excel spreadsheets and basic modeling, you need to research and invest in a proper order & inventory management system. There’s tremendous value in a system that uses your raw data to provide accurate and reliable inventory forecasting statistics.

Be Smart about Inventory Forecasting

Whether you are a “Made to Order” or a “Made to Stock” business, you should have a system in place to maximize your efficiency and ultimately help you increase your sales.

You want to optimize your investment in inventory-to-order frequency ratio, allowing your business to be the most profitable it can be. You should be checking your “needed” inventory levels each month and reviewing whether you are being as efficient as possible.