In a nutshell – Inventory Management deals with what you have, Inventory Forecasting deals with what you should have.
Inventory management is the whole practice of everything you do with your inventory, dealing with tasks such as the recording of incoming & outgoing stock, keeping track of how much stock you have on-hand in each of your locations, and which items to order from each supplier.
Inventory forecasting is an important and difficult part of inventory management that deals with making an informed decision about how much stock to order, and when.
The simplest approach is to set a ‘reorder point’ for each item of stock (SKU), and place new orders with your suppliers when the stock level reaches this point. It can be very difficult to set this accurately to the optimal level however, since it relies on predicting demand and making sure you have enough stock on hand to cover the lead time between placing the orders and when the stock arrives.
One of the most common causes of a business regularly going out of stock with items, or having excess capital tied up in stagnant inventory is that their reorder points are incorrect.
Therefore, it’s a great idea to take a continuous approach to inventory forecasting.
There are many factors that should be taken into account to make a great inventory forecast - your sales history to get a good idea of the demand trends, buffer stock to account for variability and uncertainty, plus any other adjustments for expected changes in demand (do you have new products or promotions coming up)?
Every time you place your orders, be it every day, every week, or every month, these factors should then be compared with the current stock level and the supplier lead time to come up with the optimal order quantity for each product. Getting this right will ensure you always have just enough stock on hand, but without over capitalizing with your inventory.
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