5 Common Inventory Forecasting Errors and How To Avoid Them
5 Inventory Forecasting Errors and How To Avoid Them
When it comes to running your business, you need to pay close attention to a number of moving parts simultaneously. However, as a retail business, very few of these compare to the importance of forecasting. Forecasting future sales trends and the demands of your customers has a direct impact on your ability to better manage inventory planning and decision-making.
Without proper sales forecasting, you’ll end up running out of inventory on your top items and holding too much inventory on other items. You simply can’t accurately plan your inventory without having quality sales forecasts to begin with.
As skilled inventory planners, we’re here to help save you from costly supply blunders. Here are five common forecasting errors to avoid for more accurate merchandise planning and inventory forecasting for your brand.
What Is Inventory Forecasting?
In the retail industry, inventory forecasting is one of the most fundamental concepts to master. If you’ve ever found yourself staring at a spreadsheet (or warehouse) of inventory, wondering, “How much inventory should I have?” then strategic inventory forecasting will save you time, money, and sanity.
Inventory forecasting is the process of using past sales data, ongoing (or emerging) trends, and various inventory planning strategies to accurately predict how much inventory you need to have on hand – looking solely at the numbers won’t allow you to make an appropriate assessment. For example, it’s crucial to have an understanding of when you’ll want to run heavier or leaner on certain products at various times of the year based on sales volatility. Ultimately, the goal is to always have just enough inventory to satisfy the sales demand and never run out of stock. If you’re in physical locations, you’ll also want to maintain presentation minimums, because empty shelves and bare racks are visually unappealing and can send the wrong message to customers.
With many companies often tying up their capital in inventory, knowing how much you need to spend and what you can cut back on can provide a significant advantage. When you have an adequate amount of stock to satisfy the demands of your customers, you’ll improve customer satisfaction, retention, and profits.
And yet, on average, U.S. retail businesses have inventory accuracy of 63%. So why is there such a missed opportunity with inventory accuracy? These forecasting errors may be the culprit.
Forecasting Errors to Avoid
While inventory forecasting is essential to running your business, it’s not always easy – especially with trends and customer preferences changing every season (and sometimes even more frequently!). We know inventory forecasting is difficult, and even large retailers don’t get it right 100% of the time. Here are some common forecasting errors we see, along with our advice on how to avoid them.
1. Not Having an Inventory Strategy for Your Assortment
Many retailers sell a wide assortment of inventory. They typically have their core products that customers purchase more consistently and complementary products that round out the assortment. As a result, when you’re assortment planning, it’s important to refrain from treating all items equally – assuming that all products will sell at the same rate can be a costly mistake. Top items and items that your customer expects to always be in stock should have higher inventory levels, while other items can be planned to run a little leaner.
The fashion industry is an excellent example of this. Many retailers have their core clothing items that typically account for a large portion of their sales – they’ll want to ensure that they consistently have this inventory available to adequately meet demand. On the other hand, trendier items may be important for adding visual appeal and excitement to an assortment, but they are riskier in terms of sales potential and inventory investment. These items are often planned to run leaner from an inventory perspective, and they are planned to be available for a shorter time than core items which are often available all year or for an entire season. Speaking of seasons, this brings us to our next common mistake.
2. Not Accounting For Seasonality
Another pitfall we often see business owners encounter is not accounting for seasonality – the changes in sales from week to week over a longer timeframe.
Simply looking at end-of-the-year sales for a given product won’t give you any insight into purchasing spikes or changes in consumer behavior throughout the year. It’s important to understand when customers are inclined to purchase specific products so that you can ensure you have the appropriate amount of inventory on hand.
For example, the largest seasonal build is in the weeks and months leading up to the Q4 holiday season, which drives peak sales across most categories. However, this isn’t the only time you should focus on having extra inventory on hand – depending on your product category, you may experience peaks at various times during the year. Apparel and accessories see seasonal spikes in the spring, summer, and fall, along with the anticipated Q4 holiday seasonal sales builds. Other product categories can peak at different times of year based on weather, holidays, and more.
It’s important that you account for seasonality when forecasting inventory. You want to ensure that you have enough product to meet customer demand at all times – failing to do so will leave customers disappointed and cause you to miss out on valuable sales.
3. Neglecting To Reforecast at the Item Level
Not planning at the item level can be another serious misstep when it comes to merchandise planning. Many new retailers may look at their overall, or category, level sales rather than breaking down the success or failure of individual styles or items. If their sales goals have been met, they may simply choose to place an identical purchase order to restock their inventory. However, this leaves significant room for error when you dig into the item level data. Some items can build up unproductive inventory while others fall out of stock and don’t deliver their full sales potential.
Having item-level sales and inventory forecasts can help you determine which products are in high demand and which aren’t turning as quickly. This can help you reallocate your spending to ensure that you’re purchasing the right products and at levels that will prevent you from having excess inventory or out-of-stock items.
4. Thinking All Assortment Additions Will Deliver Incremental Sales
We won’t deny it, there’s certainly a time for assortment additions. But this step must be done with great intentionality because assortment creep is real! Although adding new items to your assortment may seem enticing, it’s crucial that you understand how it’ll impact your current sales – competing items may slightly reduce the sales on the existing items in your assortment. This can still be successful as long as the total assortment is driving higher sales than before, but we can’t always assume that new items will drive completely incremental sales.
You need to look at the assortment as a whole, and looking at data and performance levels from past assortment additions can guide you through creating an inventory forecast that accurately depicts your current product offerings.
5. Planning Reorders Too Conservatively and Continually Falling Out of Stock
Last but certainly not least, on the list of what to avoid when it comes to forecasting and inventory planning is not being confident in taking action when sales are trending upward.
For example, social media is creating viral moments where product demand is exploding, and it can feel (understandably) scary to commit to the large amounts of inventory that sales trends are pointing you toward. Playing it safe and not increasing inventory to match the sales trend can leave retailers out of stock and prevent them from achieving their overall sales potential. And in today’s market, if you’re out of stock you can be losing customers as they look elsewhere to fulfill their needs.
Having an expert inventory planner to look at your data and give you the confidence to place reorders that keep you in stock is important during this growth period. You want to retain and continue to grow customers rather than disappoint your audience due to a lack of inventory.
Avoid the Potholes, Anticipate the Success with Boon
Can you avoid these common forecasting and demand management mistakes and get higher inventory accuracy? The short answer is YES! And easily!
When you bring on a team of inventory planners like Boon to spearhead your demand forecasting and inventory management efforts, you can eliminate some of the stress associated with running your business.
Here at Boon, we know inventory planning isn’t for the faint of heart. Our team of experts works alongside our clients to generate inventory forecasts that accurately reflect current industry trends and predicted levels of customer demand. Contact us today to learn how our customized inventory forecasting can help retailers make more profitable decisions.