One of the most valuable and critical tools for an inventory-based business is the ability to predict what sales will look like in the future. Accurately forecasting sales can help businesses make tactical decisions about production, inventory levels, and overall business strategy. These forecasts can also help maintain the delicate balance between supply and demand while avoiding surpluses and stockouts, allowing a business to remain as profitable as possible.
Ultimately, forecasting sales plays a vital role in an inventory-based business’ success, and allows it to best achieve its business objectives and service its customers. By understanding sales forecasts and how to ensure their accuracy, inventory-based businesses can balance supply and demand, optimize their inventory, best manage customer relationships, and make strategic decisions.
Here’s everything you need to know about properly forecasting sales, including how to get the most out of your forecasts.
Sales forecasting (also called demand forecasting) is the process of estimating future sales volumes to make informed decisions about ordering, production, and inventory levels. It’s a critical process because the success of an inventory-based business relies heavily on how it stocks and moves inventory. For example, not ordering enough inventory ahead of a big surge can lead to stockouts (and therefore dissatisfied customers), while ordering too much can lead to a surplus, where inventory sits on shelves.
The importance of sales forecasting in inventory-based organizations cannot be overstated. Here are some of the ways sales forecasting plays a direct role in these businesses:
Sales forecasting helps organizations strike an appropriate balance between stocking enough inventory to meet demand, without over-ordering and accumulating excess inventory. Achieving and maintaining this balance is essential for maintaining cost efficiency and optimizing resource utilization.
Accurate sales forecasts are instrumental in optimizing inventory levels. Maintaining the right amount of stock minimizes holding costs while ensuring that products are readily available to meet customer demand.
Sales forecasts allow for strategic decisions for everything from marketing and production planning to investment decisions. Strategic decisions based on reliable forecasts can give businesses a competitive edge in the market and can play an integral role in their success.
Inventory-based businesses need to meet customer expectations to provide them with a positive experience. For example, research shows that nearly half of consumers are willing to wait two days or less for a delivery, while 20% say they would wait for up to four days. If an inventory-based business is not stocking the correct amount of inventory, customers might experience delays, which could lead them to have a negative experience. Additionally, accurate inventory forecasting supports relationship management by allowing organizations to communicate effectively with customers about product availability and delivery timelines.
Accurate sales forecasting relies on a combination of methods and techniques that leverage historical data, market insights, and statistical models. The choice of method often depends on the nature of the organization, the industry, and the availability of data.
Here are some of the common approaches for forecasting sales:
Quantitative forecasting models refer to using historical data to predict future sales needs. Equations and algorithms are applied to past sales data to predict future sales needs. There are different methods used for quantitative models, including time series analysis, moving averages, linear regression, and naive forecasting.
Qualitative approaches involve analyzing data and insights that are non-numerical, which seeks to uncover meaning and underlying motivations of behavior. Qualitative approaches to sales forecasting can include seeking input from industry excerpts, as well as the Delphi Method, which involves referring to a panel of experts who provide anonymous opinions that are iteratively refined through rounds of feedback.
This technique involves observing recent public market and trend data and using those insights to inform predictions. This might look like changing shopping habits or customer preferences, for example. This data can come from conducting consumer surveys to get direct feedback, or by observing market and trends moves. Market research can also include competitor analysis, where you monitor your competitors’ performance to better understand market trends.
Developing a sales forecast is a structured process that involves several key steps to ensure accuracy and reliability. Here are the typical steps that you can use to execute sales forecasting.
Start by collecting historical sales data, ideally spanning multiple periods to capture trends and seasonality. Use reliable sources such as sales records, invoices, or point-of-sale systems. Also, conduct a thorough analysis of historical sales performance, looking to identify patterns, cycles, and any external factors that may have influenced sales during specific periods.
Clearly define the objectives of the sales forecast, as well as the scope. Are you forecasting a specific product, market segment, or the overall business? Also, ensure that the goals of your sales forecast align with broader business goals and strategic objectives. Consider factors such as market expansion, product launches, or changes in distribution channels.
Choose the appropriate forecasting methods based on your objectives, data availability, and the nature of your business. Utilize a combination of quantitative methods (such as a time series analysis or regression models) and qualitative insights for a comprehensive, well-informed forecast.
Forecasts aren’t only shaped by historical data, and it’s also important to take external factors into account. These factors might include market trends, economic conditions, consumer habits, as well as any industry shifts that can impact sales. Also, be aware of any disruptors or events that could impact the accuracy of your forecast.
Set regular review periods to assess the accuracy of your sales forecast. This could be monthly, quarterly, or at another interval that aligns with your business planning cycle. During the review, compare the forecasted sales figures with actual sales performance during each review period. Identify any discrepancies and analyze the reasons behind variations between the forecast and actual results.
Also, incorporate feedback from relevant stakeholders, such as the sales team, marketing team, and even customers. You can adjust your forecast based on changing market conditions, customer preferences, or other factors that may impact sales.
Sales forecasting is a mission-critical task that needs to be completed as comprehensively and accurately as possible.
Here are some best practices to keep in mind when forecasting sales.
Today’s inventory-based technology can vastly improve the speed, efficiency, and accuracy of the sales forecasting process. These tools can quickly produce distinct types of advanced forecasts, which can consider not only historical data but also special events. They can also help you avoid common forecasting errors, which can reduce the accuracy of your forecasts. Aside from the ease at which these tools produce forecasts, they can also help produce forecasts that are more accurate. One study found that when you “remove human bias, errors, and other issues that stem from manual efforts, satisfaction with forecasting accuracy grows to 76%.”
Ultimately, forecasting technology can reduce workloads and improve the accuracy of results.
Data and insights for forecasting sales should come from different departments in an organization. For example, you can collaborate with the sales team to gain insights into market trends, customer feedback, and any challenges they are encountering. These team members are “front-line” employees who can provide valuable qualitative input that complements quantitative data.
You can also engage with the marketing team to understand upcoming campaigns, promotions, and strategies that may influence customer demand. Other departments such as finance, operations, and customer service can also offer similarly useful insights. This cross-functional collaboration ensures a comprehensive understanding of various factors influencing sales.
Periodically review the assumptions and parameters used in your forecasting models to ensure they remain relevant and aligned with current market conditions and business objectives. You should also periodically review the performance of forecasted sales figures against actual results, to ensure their continued accuracy. You can also use these reviews to analyze trends, patterns, or other anomalies that can inform adjustments to future forecasts.
Provide ongoing training and support for individuals involved in the forecasting process. Ensure they’re familiar with all tools, technologies, methodologies, and market trends your organization is using for forecasting. If your organization is using a supply chain planning suite that offers forecasting features, be sure that all relevant stakeholders are aware of how to best put it to work.
If you’re looking for a comprehensive solution for your inventory-based business that can help you generate accurate, meaningful forecasts, then StockIQ is what you’re looking for. Our software offers advanced demand forecasting software to improve your inventory management and supply chain operations.
Our proprietary forecasting algorithm has been tested on over one billion time series to ensure it generates accurate, sensible forecasts. Find out how StockIQ can help your organization generate accurate, useful forecasts by contacting us today.