Forecasting Demands: Strategies to Avoid Stockouts and Overstocking

12 min read

Managing inventory can be tricky for a company. You might play it too safe and buy more than you need, just in case. These actions can lock up valuable funds in idle inventory, putting the business under financial pressure. Also, if inventory sits around too long, it can get outdated or damaged.

Alternatively, you might sell out too quickly and fail to replenish your stock in time, losing potential customers.

To dodge these scenarios, it’s all about understanding demand and keeping just the right amount of stock — find out how in this article.

Why Is It Important to Balance Stock Levels?

Running low on stock can be a real headache and make it tough to do your job well. Over time, this can frustrate customers with long wait times or broken promises. As trust fades, you might start losing clients and hurting your reputation, which isn’t great for business.

Having too much stock can also be risky. The longer stuff sits on the shelf, the more likely it is to expire, get damaged, or become unsellable.

Plus, investing too much money in extra stock means having less cash on hand for other business needs, which could strain finances.

Forecasting demand helps you maintain the right balance of stock levels. Let’s explore the factors affecting demand and discover strategies to stay ahead of it.

Methods for Determining Demand

Getting demand right helps you avoid wasting resources on inventory and ensures you keep up with customer orders. Let’s discuss how exactly you can get a better understanding of demand.

Historical Data Analysis

Historical data is one of the best ways to forecast demand. Usually, it means using your own sales data.

If you’ve been selling for some time already, this won’t be a problem — you can track your sales and use that information to predict future demand. The easiest way to do this is by accessing the data on your ecommerce platform.

Take Ecwid by Lightspeed, for example. It provides sellers with the Orders report, which shows how many items customers typically buy, how many you sold over a certain time and other insights.

Ecwid also gives you a handy Product Sales and Stock Overview report. It’s a quick summary of what you’ve sold over a certain time and where your stock levels stand. Plus, you can compare these stats to the previous period to see if sales for specific items have gone up or down.

A Product Sales and Stock Overview report in Ecwid admin

Market Research

If you’re just starting a business, market research can help you determine the potential demand for your product or service. It allows you to follow customers’ spending habits while also getting a good grasp of the price changes throughout the supply chain.

Depending on your industry, there are many resources to determine demand. Trade magazines are a great example of this.

Alternatively, set up pre-orders in your online store. This way, you can gauge the level of demand before investing in inventory.

Accepting pre-orders in an Ecwid store

Predictive Modeling

Predictive modeling is a technique used to forecast outcomes and anticipate how your company will perform in various scenarios.

Incorporating predictive modeling into your operations also enables you to develop purchase and sale strategies that minimize the risk of stockouts.

This option is more suitable for large enterprises as it can be quite costly and is usually done by data specialists.

Factors Influencing Demand

There are lots of things that influence demand. We can’t cover them all, but we always focus on three key factors and suggest you keep an eye on them, too.

Seasonal Trends

Seasonal trends influence nearly every industry. Understanding these cyclical patterns is vital for accurate demand forecasting. Seasonal variations encompass weather changes, holidays, vacations, school schedules, and sporting events.

Recognize the seasonal trends specific to your market and integrate them into your business and marketing strategies. For example, if you sell winter gear, you’ll likely experience a surge in demand during the colder months. On the other hand, if you sell swimsuits, your peak season will be during the summer.

Incorporate these trends into your inventory planning to anticipate demand fluctuations and identify potential stockouts before your competitors do. For example, if your market experiences an annual spike in demand during the holiday season, stock up on popular items well in advance.

Consumer Behavior

Understanding consumer behavior and purchasing patterns is crucial for accurate demand forecasting and avoiding stockouts.

Moreover, tracking consumer behavior can significantly enhance your product turnover rates.

A product turnover rate measures how quickly inventory is sold and replaced with new stock. This metric is essential for avoiding excess inventory.

A formula for calculating inventory turnover rate (COGS means cost of goods sold)

Also: Key Financial Metrics Every Ecommerce Business Owner Should Master

To better understand consumer behavior, consider implementing a customer relationship management (CRM) system to track purchase history and preferences. This data can help you identify popular products, determine buying patterns, and tailor marketing efforts to specific demographics.

Market Dynamics

Market dynamics means analyzing and understanding how external factors such as industry trends, economic conditions, and consumer preferences impact your business. You can adjust your product offerings by staying up-to-date on these dynamics.

Staying informed about market trends and competitors helps to maintain a competitive edge and capitalize on opportunities others may miss.

Here are some resources to help you stay up-to-date:

Google Trends: This tool allows you to see search interest for specific keywords and topics over time. Use it to track trends and compare your business’s popularity with others in your industry
Industry publications: Subscribe to trade magazines, newsletters, and blogs on your industry. These sources can provide valuable insights into market dynamics.
Social media: Follow thought leaders and competitors in your industry; they often share news and updates about your niche.

Maintaining Optimal Inventory Levels

In addition to understanding the demand, you can follow some other practices to maintain optimal inventory levels. These include:

Training Your Team

To prevent overstocking and better manage finances, set up guidelines for the purchasing team to follow. For example, establish a minimum and maximum inventory level for each product based on demand. This will help your team make more informed purchasing decisions.

Also, ensure your ordering team is familiar with the specific terminology used by your suppliers. Using the correct internal names for products helps prevent misunderstandings and ensures that your orders are accurately fulfilled.

Ensure that only the staff responsible for managing inventory are granted permission to update stock levels in your online store. This precaution helps prevent potential errors. With Ecwid, you can easily assign specific staff permissions to restrict access to certain parts of your online store.

Investing in Inventory Management Software

Using inventory management software can greatly simplify maintaining optimal inventory levels. These tools allow you to track stock levels, monitor demand, and set up automatic reorder points for when inventory reaches a certain threshold. This can save time and reduce human error when managing your inventory.

Selecting the right inventory management tools depends on the type of inventory you handle and your customer interactions. Different businesses have varying needs: some manage large volumes of bulk items, while others are part of a supply chain without direct consumer interaction.

Ecwid by Lightspeed is an ecommerce platform that comes with a set of automated tools that make managing inventory for an online store a breeze. Here are just some of them:

Specifying the stock quantity for your products. When customers make purchases, our system will automatically update the stock levels, with no extra effort required from you.
Restock alerts. You’ll get a notification when your inventory is low, ensuring you don’t run out unexpectedly and giving you time to restock.
Pre-orders. Minimize lost sales and generate revenue even before your products are in stock.

Learn more about managing inventory in your Ecwid store.

Ecwid sends you low-stock notifications automatically, so you can restock products on time

Building Reliable Supplier Relationships

Maintaining good relationships with your suppliers is crucial for successful inventory management. To do that, follow these tips:

Communicate regularly: Keep your suppliers informed about any changes in demand or inventory needs.
Pay on time: Ensure that you pay your suppliers on time to maintain a good rapport with them.
Plan ahead: Work with your suppliers to forecast future demand and plan accordingly.
Diversify your supplier base: Having multiple suppliers can help mitigate risks in case one supplier is unable to meet your needs.

Having a good relationship with your supplier can help negotiate some benefits, such as establishing net 30 payment terms. This arrangement allows you 30 days to pay after receiving goods, providing you with more flexibility.

Take a Step Towards Better Inventory Management

Predicting demand is a crucial element of effective inventory management. Take into account the seasonal highs and lows, consumer behavior, and what’s relevant in the market. Continuously track your inventory and ensure your employees are keeping it correctly updated.

On top of that, software can take your efforts to the next level. Ecwid by Lightspeed isn’t just about managing inventory; it offers a range of tools to help you run and grow your business smoothly. Whether you’re new to the game or a seasoned pro, it’s definitely worth checking out.

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Business Finance

Sep 5, 2024

About the author

Anastasia Prokofieva is a content writer at Ecwid. She writes about online marketing and promotion to make entrepreneurs’ daily routine easier and more rewarding. She also has a soft spot for cats, chocolate, and making kombucha at home.