If you’re an Amazon seller or e-commerce business leader, no doubt you know the importance of keeping your inventory just right. Too much and it can cost time and money to store items; too little and you risk missing out on sales opportunities.
To get a clearer picture, many now turn to inventory forecasting as a critical part of their Amazon FBA strategy. With an understanding of inventory forecasting principles – plus some innovative implementation techniques – staying ahead of demand while avoiding costly stockouts can become a reality. So if Amazon inventory management is keeping your business from reaching its full potential, it’s probably time to explore the basics of Amazon’s inventory forecasting strategies and explore the best practices for implementing them. No matter your organization’s size or sector, applying these concepts will help ensure success in streamlining operations and maximizing profits through smarter stocking decisions.
What is inventory forecasting, and why is it important for Amazon sellers?
Inventory forecasting is a crucial aspect of success for Amazon sellers, and any e-commerce business for that matter. Essentially, it is the ability to predict how much product a seller will need to meet the demands of their customers. Through data analysis and algorithms, sellers can anticipate fluctuations in demand, adjust their inventory levels, and ultimately avoid stockouts or overstocking. This ensures that customers receive their orders in a timely manner and helps sellers save money by avoiding unnecessary inventory costs. By leveraging this data-driven approach, sellers can optimize their operations, maximize their profits, and stay one step ahead of the competition.
However, several factors can impact the accuracy of these forecasts, such as economic fluctuations, market trends, seasonality, and even unforeseen events such as natural disasters. To counteract these factors, e-commerce businesses must rely on lots of data and sophisticated forecasting models incorporating historical and real-time sales information. Additionally, implementing an inventory management system that tracks inventory levels, identifies trends, and adjusts forecasts accordingly can significantly improve inventory planning accuracy.
Types of inventory forecasting
While there is no foolproof method to forecasting demand on Amazon, e-commerce businesses that take a proactive approach to forecasting and continuously monitor changes in market conditions will be better equipped to adjust to changing customer needs and stay ahead of the competition.
Demand forecasting covers a range of approaches, models, and formulas. However, for companies, choosing the proper method is crucial for success. There are typically six types of demand forecasting to consider, divided into active versus passive methods, short-term versus long-term horizon, and internal versus external focus from the business’s perspective.
For stable sales, passive demand forecasting is reasonable. This method involves an automated “set it and forget it” process that uses historical and other data to project trends. This isn’t the best method for fast-growing companies or markets with disruptive activities.
On the other end of the spectrum, active demand forecasting is a more hands-on process that uses customized forecasts and specialized knowledge. This method is necessary for companies in dynamic marketplaces and fast-growing industries because past performance isn’t enough to predict future results.
Finally, artificial intelligence forecasting combines the strengths of both passive and active forms, providing non-human input and statistical techniques. Today, software automates forecasting processes for companies using enterprise resource planning systems. While passive forecasting still has a role to play, active forecasting is the way forward for companies that want to remain competitive.
Short-term demand forecasting is a vital concept; however, different firms have different timelines, so defining what qualifies as “short” can be challenging. Nonetheless, it’s typically between a quarter to a year. An interesting way to test the accuracy of this method is forecasting weekend sales using trailing year trends or identifying sales for an upcoming holiday weekend, given the last three years of data for that weekend.
Long-term demand forecasting can be complex and less precise than short-term ones. Bird’s eye projections tend to be limited, primarily due to misassumptions and unforeseen business decisions, no matter how well planners collaborate with forecasters. However, long-term forecasts can help make roadmaps that posit where things might go under different assumptions. They’re perfect for brainstorming “what if” scenarios and becoming a little bit more precise to help with planning.
Internal demand forecasting is an analytical technique that uses firm-level data along with information about a client base to predict demand for specific goods and services. These data sets include historical sales, past and present financial metrics, and sales team predictions. On the other hand, external macro-level demand forecasting is useful in incorporating more significant trends into a company’s planning and projections. This is because it takes into account factors like industry growth, customer socioeconomic status, innovation trends, and other factors that may impact business expansion and development.
Incorporating macro-level forecasts of consumer demand can help weigh risks and trade-offs, such as investing in an existing product versus expanding and launching a new one.
Amazon’s inventory forecasting tools can help your brand grow
Obviously, if you’re selling on Amazon, you know that there is nothing more frustrating than running out of stock. It can derail your sales, hurt your rankings, and ultimately cost you money. Luckily, Amazon has tools at your disposal to help prevent this from happening. Their inventory forecasting tools are some of the best in the business.
These tools use data from your past sales, current inventory levels, and even external factors like seasonality to accurately predict how much inventory you’ll need in the future. And with their intelligent algorithms and machine learning capabilities, these tools can even account for unexpected shifts in demand. The benefits of using Amazon’s inventory optimization tools are clear: you’ll save time, money, and a whole lot of headaches.
Watch out for these forecasting pitfalls
One key challenge lies in accurately accounting for external factors that can influence demand, such as changing consumer trends and unpredictable weather patterns. Additionally, Amazon’s vast catalog of products can prove a limitation, with some items lacking sufficient sales data to make accurate forecasts.
Despite these challenges, savvy sellers can still leverage Amazon’s forecasting tools to their advantage by staying nimble and proactive in their inventory management strategies. With the right expertise and approach, these tools offer invaluable insights that can help businesses stay ahead of the curve and succeed in the fiercely competitive world of online retail.
When it comes to inventory forecasting, businesses must be careful not to rely solely on historical data and fail to consider external factors that may impact demand. Additionally, not regularly reviewing and updating forecasting models can lead to inaccuracies and missed opportunities.
Another challenge Amazon sellers face is underestimating the importance of collaboration between departments and across the entire supply chain. By fostering open communication among various teams, such as procurement, marketing, sales, and logistics, sellers can gather diverse insights and data points that contribute to a more holistic understanding of customer behavior and market trends. This integrated perspective allows sellers to ensure that the right products are available at the right time, effectively reducing stockouts and overstocks, leading to improved customer satisfaction and more efficient use of resources. Furthermore, collaborating with external partners like suppliers and manufacturers enables Amazon sellers to be agile in responding to fluctuations in demand, enhancing their ability to adapt and succeed in the highly competitive e-commerce landscape.
Seasonal fluctuations and unexpected changes in demand can also throw a wrench into even the best forecasting strategies. So what can sellers do to adjust their approach? Start by gathering as much data as possible on past sales periods and any relevant trends. This information can help identify patterns and potential peaks or drops in demand. Additionally, utilizing dynamic pricing algorithms and monitoring current trends can keep sellers ahead of the curve and allow for quick adjustments as needed. By staying knowledgeable, adaptable, and proactive, Amazon sellers can navigate the tricky waters of inventory forecasting – no matter the season.
Prepare for the future with Amify
By accurately predicting future demand, sellers can maintain optimal inventory levels that reduce warehouse costs while ensuring product availability. However, relying solely on Amazon’s tools and services requires overcoming some challenges and limitations.
Amify’s team of over 60 experts specializes in areas like warehousing, logistics, optimization, content creation, and more, and they’re ready to unload the burden of navigating Amazon’s complex landscape. As Amazon’s seller fees steadily rise and consumers’ demands fluctuate, you need a partner with the right approach to keep up. Call us today for a free consultation, and learn how we’ve helped clients generate over $400 million in sales on Amazon.