Demand forecasting is the process of analyzing customer demand and determining the number of units required to maintain sufficient supply without shortage or overstock. This form of inventory forecasting allows businesses to determine and control their distribution methods along with their overhead costs and expenses.
There are arrays of distribution methods from producer to buyer. The producer may sell directly to the buyer, or the distribution may involve one or several agents -- wholesalers and retailers that bring the products to the buyer. The buyer can be an individual consumer or a business. Regardless of the method of distribution, a business’s available inventory always impacts its ability to meet its customer’s demands.
Proper inventory forecasting allows a business to properly reorder its items from its suppliers before the current inventory is depleted. The order process takes into account the amount of time needed for an order to be processed and delivered, along with the potential customer sales that occur during the process. The lead time indicates the potential sales that will occur while an inventory order is in process. Safety stock represents the additional inventory that serves as the business’s reserve in case of unexpected sales fluctuations while awaiting delivery of an order. The lead time demand plus the safety stock reserve equals the point at which the business must reorder its inventory before inventory shortages occur.
Normal distribution methods are dependent upon inventory forecasting. It is important for a business to never hold too much inventory, as the inventory can quickly become outdated while waiting to be used and sold. Aspects such as product recalls and spoilage can make the inventory unusable. If this occurs, the inventory becomes a business loss for the company, which also results in the loss of revenue.
Businesses that fail to carry enough inventories can also experience a loss in sales and customers. If the business does not have enough inventories, it may be unable to meet the demands of its customers. This lack of availability can steer customers towards competitors that are able to meet their demands. While many customers may return, some customers may be lost to those competitors simply because of the competitor’s ability to meet the customer’s immediate needs.
Businesses that control their inventory are able to control their potential losses. The inventory forecasting model allows businesses to predict the highs and lows of their demands, which helps them properly plan their operations efficiently for future inventory and customer demands.
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