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It’s easy to forget, with all the focus on PPC bids, buybox and A9 rankings, that there is a physical side to any business that trades in physical goods. To get products to your customers, you need to store them somewhere, but how do you know how much to have at any given time?
Having effective inventory forecasting is crucial to having a successful business - you don’t want to have too much or too little, because either can have consequences.
Beyond just leaving money on the table from sales you could have made if you have available stock, having too little inventory can turn customers off and bump you down the A9 ranking. Having too much, on the other hand, can drain money that you could have spent elsewhere and result in excess storage that can get you slapped with long-term storage fees, bringing down your Inventory Performance Index in the process.
Put simply, getting your inventory wrong can make it harder for customers to find you in search, and can limit how much you can ultimately store at Amazon warehouses, both of which will have a detrimental effect on your sales.
So how can you accurately and reliably predict how much stock you will need to never run out?
Forecasting can be accurate, but it will never be a perfectly exact science. You will need to forecast for multiple things, including both demand and sales. In a perfect world, demand forecasting and sales forecasting would be the exact same, but it doesn’t quite work like that.
In simple terms, demand forecasting tries to determine the level of customer demand there may be, while sales forecasting tries to determine how much of that demand you could convert into sales. Ideally, you would want to focus on the gap between the two and figure out a way to close it.
To see how much you will need in the future, you will naturally need to take a look at how you’ve been doing in the past. Amazon has a number of useful tools available for this - whether you are a seller or a vendor, you will have access to "Business Reports" that will detail the sales, sell-through rates, and inventory performance of products in the past.
This will help you look at yearly, monthly and even weekly sales trends, allowing you to establish baselines, on top of which it will also let you gain insight into seasonal trends depending on what time of year it is. For this reason, you will want to have both a seasonally-adjusted sales forecast - typically based on current sales volumes and seasonal trends - as well as a moving average.
It will also help you understand what type of demand your product has. Fast-moving consumer goods like washing liquid or regular consumer goods like books and video games are likely to have a steady demand year-round. Something like a winter coat, on the other hand, will for obvious reasons display more of a seasonal cycle even in geographies where it may be cold year-round.
In addition to looking at past performance, you will also need to look at where things are going. Keep an eye out for any trends that may have an effect on your sales. You may start to notice these in your sales figures - maybe numbers on certain items are trending up or down in a way that reflects some sort of consumer sentiment or performance within your own business - it could include seasonality, competition, customer demand, advertising and other factors, which can present an opportunity if you are able to identify it in time.
Fortunately, while trends come and go, most of them stay at least long enough for you to be able to make some money from them if you catch on quickly enough. Beware though of seeing everything as an opportunity - sometimes trends in your sales are just random.
Keeping in regular contact with your suppliers is crucial to keeping up a healthy level of inventory. You want to make sure that they are not having any issues with production or with personnel that could affect your stock in the coming few months - you want to do it with enough time so that if any issues do arise you can get ahead of them with alternative options.
Remember that there is, obviously, a feedback loop between your promotions and advertising and your inventory. If for whatever reason you are finding yourself running low on stock, adjust your marketing accordingly. Temporarily missing out on additional promotional sales is still better than not being able to deliver if people want to buy from you.
You can do all this yourself, but there are also inventory optimization software available on the market to help manage your inventory and automate the forecasting for you.
Schedule a free 30-minute audit call with a specialist today.
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Threecolts acquires, launches, and grows eCommerce software & services, and owns other stellar businesses including Old Street Media, HotShp, SellerBench, Tactical Arbitrage, Bindwise, RefundSniper, ChannelReply, and FeedbackWhiz.
Old Street Media supports businesses with their advertising, inventory management, and other eCommerce services. We collaborate with over 4000 brands and have generated $600M in sales in the past year.
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