Forecasting the amount of inventory you need for a certain time period is by no means easy. Fortunately, there are ways to ensure that you’re supplied with enough product, but not too much product: inbound versus outbound forecasting.
When it comes to forecasting, we have some tips and tricks we use in our own business, so we’re sharing them with you in the hopes that you can apply them to your business moving forward. We believe it’s not about simply surviving the busy seasons; it’s about thriving. These tips will help you do just that!
The Importance of Inventory Forecasting
In short, forecasting is essential because the market ebbs and flows. You don’t want to get into a position where you bought way too much inventory that you can’t sell, but on the other hand, you need to make sure you buy enough for peak season.
For peak season (usually December), you need to be ready to have 3.5x the number of sales you usually have. By following a formula to forecast sales, you can get data on the forecasts for overall, weekly, and daily volumes.
Forecast to ensure you’ll have a smooth season where you’re not panicking with too many orders or left with too much inventory afterward. If you’re not forecasting how many units you need, you’re taking a shot in the dark, so we’re going to summarize the basics below:
1. Overall Q4 volumes forecast
The process starts with forecasting how much inventory you think you will need for Q4. This can be inferred from your data from last year. What was the peak surge last year? This should guide your forecasting.
First, think about if the warehouses have enough products to support your needs. There are challenges in the global supply chain, so take that into account as well. That should also influence your Q4 volumes forecast.
2. Volumes by week forecast
Once you’ve solidified your overall Q4 volumes forecast, break it down by week. Each week is going to look different, so narrow down inventory needs for each individual week by looking at your historical data and making an educated guess based on your growth this year and your volume of sales the last several years.
3. Volumes for “cyber 5” days
Next step: Break down your inventory needs for each day. Think about important shopping days, such as the “cyber 5” days (Thanksgiving thru Cyber Monday), for example, or the days leading up to Christmas. Once again, look at your historical numbers – if last year during this time you saw a 30% lift in sales, you should be prepared with 30% more inventory this year as well (and remember, this number could be very different if you’ve grown over the past year, so always work in percentages!).
This is an important exercise where the sales, marketing, and operations teams have to come together and align on a number together. By understanding your needs, you can make sure your entire team is on the same page and prepared for the season ahead.
Outbound vs. Inbound Forecasting
As discussed above, we have to understand how much each warehouse is going to ship for each day. This needs to be done for both what you’re shipping (outbound) as well as what you’re receiving (inbound). The inventory the warehouse receives is 12-15 weeks in advance to the forecasts.
When you have the inbound and outbound forecasts, it comes down to people planning. Here’s what you need to forecast for:
- How much product your warehouse is receiving per hour. This way your warehouse can ensure there are enough people on the job to receive the inbound order. We’d add a buffer of 20% when planning for labor.
- Similarly, understand how much product your warehouse is sending out. Again, using this data, you can ensure your labor is planned.
- Next is system planning. Your website has to be able to handle the amount of traffic it’s getting, so narrow down the most popular days, the busiest hours, and the high-traffic minutes that will have the most amount of users on your site.
Plan for your systems to be able to handle those high-traffic moments. Your engineering team should be stress testing your website to ensure it can operate under the pressure of busy times.
Almost every holiday season, we see issues around systems. You can use your forecasting data to ensure your website can handle the traffic it’s expecting.
After Planning: It’s Game Time
There are three things you can control as a business.
- Sales timing and amount (sales)
- Advertising (don’t advertise for inventory that is low)
- Product placement (email or website)
But there’s one thing businesses can’t control, and it’s the most important aspect of an eCommerce business: Shipping.
None of us want to disappoint our customers. So how do we avoid it this year? There are some tools that help you understand delivery performance. For example, take a look at the delivery performance of priority shipping USPS before peak season:
None of the deliveries in the country take more than 5 days pre-season. Yet let’s look at the priority USPS shipments during peak season:
You can see here that the priority shipping is delivered in 5+ days during the holiday peak season. Whether there are issues with labor, weather, or tracking.
What can you do as a business? Localize inventory!
You could stop selling ahead of time to ensure that no shipments arrive after Christmas, but this means you would have to stop selling on December 12th, which would cause you to lose nine days of holiday sales (which is equal to an entire month of sales during peak season!), as most of the need is before the holiday.
Therefore, another strategy you could take is to manage the problem and localize your shipments. In other words, don’t send your inventory across the country. Try to keep it as close to the demand as possible, even regionally, to ensure that shipments aren’t late. Understand where your demand is so that you can localize your inventory.
Localizing shipments will ensure you don’t struggle with any backorders.
When you use regional shipments, your customers are likely to get it the next day. You’ve turned the problem from an issue (customers receiving late packages) to an opportunity (now you’re giving excellent service).
Plus, most of your competition will stop selling by this time because they do not want to have deliveries occur after the holidays. Once again, you have now gained extra, very important days to sell – remember, the nine extra selling days you get during the holidays equate to about one month of sales any other time of the year – and your ad effectiveness and conversions will increase because so many other eCommerce businesses would not be selling during the peak time.
When you know what to expect, you can change your game plan as needed. For example, if your inventory is low, stop marketing for that product. Ramp up marketing for products that are not being sold as fast as expected.
If you take anything away from this article, take away our number one tip: Localize your shipments. This will help you gain 9 more days of sale opportunities. It’s like having a store in every city, except your business offers the convenience of products delivered to your consumer’s doorstep!