5 Common Forecasting Errors and How to Avoid Them

When it comes to managing your business, few tasks are as crucial as forecasting, especially in the retail industry. Accurate sales predictions and demand forecasts directly influence your ability to make informed inventory decisions. Without proper forecasting, you risk running out of inventory for top-selling items while holding excess stock for others. In essence, quality sales forecasts are the bedrock of effective inventory planning.

As seasoned inventory planners, we're here to help you steer clear of costly supply mishaps. Here are five common forecasting errors to avoid, ensuring more precise merchandise planning and inventory forecasting for your brand.

Defining Inventory Forecasting

Inventory forecasting is a fundamental concept in retail. If you've ever wondered, "How much inventory should I have?" then strategic inventory forecasting is your answer. This process, integral to supply chain management, revolves around predicting future product demand and determining the optimal stock levels to meet that demand. It combines historical sales data, market trends, and quantitative and qualitative factors to guide businesses on what, when, and how much to stock.

However, inventory forecasting is more than just science; it's an art. It involves understanding when to maintain varying inventory levels throughout the year based on expected sales fluctuations. If you have physical locations, presentation minimums are critical to avoid empty shelves, which can deter customers.

Given that inventory is often a company's largest financial investment, accurate forecasting can enhance liquidity and customer satisfaction while maximizing profits.

The Elusive Goal: Near-Perfect Inventory

Despite the importance of inventory forecasting, the average U.S. retail business achieves only 63% inventory accuracy. What's causing this gap in inventory management? Let's explore the primary culprits.

Forecasting Errors to Avoid

1. Lacking an Inventory Strategy for Your Assortment -Retailers typically offer a broad range of inventory, from core products to complementary items. Treating all items equally and assuming they'll sell at the same rate can be a costly mistake. Rapid shifts in consumer preferences, seasonal variations, and unpredictable market trends make it challenging to predict and adapt to changing demand accurately. We often recommend a tiered approach. Maintain higher inventory levels for core items, slightly less for versatile products, and the leanest stock for trendy or seasonal items. This tiered approach offers flexibility in managing changing customer demand.
2. Ignoring Seasonality- Failing to account for seasonality can lead to significant forecasting errors. Looking solely at year-end sales won't reveal purchasing spikes or shifts in consumer behavior throughout the year. To create a comprehensive inventory plan, you need to analyze your business at a more granular level. Different product categories may experience peaks at various times during the year. Accounting for seasonality in your inventory forecasting is crucial to prevent overstocking or understocking, ensuring that you meet customer demand while avoiding excess inventory.
3. Neglecting Item-Level Reforecasting- Failing to plan at the item level is another common misstep. Relying on overall or category-level sales data can lead to inefficient inventory allocation. Some items may accumulate unproductive inventory, while others fall out of stock, resulting in missed sales opportunities. Item-level sales and inventory forecasts can help identify products with high demand and those that may not sell as quickly, allowing for a more balanced inventory allocation.
4. Assuming All Assortment Additions Drive Incremental Sales- Adding new items to your assortment can be enticing, but it must be done intentionally. New additions can impact existing sales, and competing items may reduce the sales of current products. Analyzing your assortment as a whole and reviewing past assortment additions can guide an inventory forecast that accurately reflects your current product offerings.
5. Planning Reorders Too Conservatively and Continually Running Out of Stock- Fearing large inventory commitments when sales trends surge, especially due to viral moments on social media, can lead to chronic stockouts. In today's market, being out of stock when customers want your product can send them to your competitors. To maximize sales potential, it's vital to confidently increase inventory when sales trends rise.

A Common Thread: Limited Historical Data

Limited historical data plays a role in all of these common forecasting errors, presenting an extra hurdle for new businesses. During the early stages of business, seeking support from experienced inventory planners can be a critical investment. Collaborating with a seasoned team can offer valuable insights and guidance based on similar business performance, helping you make the most of your startup capital.

Avoid Pitfalls, Anticipate Success with Boon

Can you sidestep these forecasting and demand management pitfalls to achieve higher inventory accuracy? The answer is a resounding yes! When you engage a team of inventory planners like Boon to lead your demand forecasting and inventory management efforts, you can reduce the stress of running your business.

At Boon, we understand that inventory planning can be challenging. Our team of experts collaborates with clients to create inventory forecasts that accurately represent industry trends and predicted customer demand. Contact us today to learn how our customized inventory forecasting can help retailers make more profitable decisions.