How to forecast demand to prevent stockouts

 

How to forecast demand to prevent stockouts

What are Stockouts?

A stockout, also called an Out-of-Stock (OOS) event, is when a business runs out of a particular product, and it becomes unavailable for purchase. This is due to several reasons, including supply chain disruptions, unexpected spikes in demand, and poor inventory management. OOS events can lead to lost sales, dissatisfied customers, and reputational damage.

Common Causes of Stockouts and Their Impact

Stockouts arise from different causes, each with a distinct impact on the business. Understanding these cause-and-effect relationships is the first step to dealing with the question“What is the best way for a retailer to avoid stockouts?”

• Inaccurate demand forecasting, often due to reliance on outdated data and neglect of current market trends, can lead to lost sales and customer dissatisfaction.
• Supply chain disruptions happen because of unexpected events (e.g., natural disasters, health crises, and geopolitical issues) or operational failures. Preparedness for any eventuality minimizes production delays and potential retail stockouts.
• Poor inventory management is due to a lack of real-time visibility leading to inefficient tracking. Aside from missing sales opportunities, this increases costs because of emergency orders and expedited shipping to address stockouts.
• Poor coordination with suppliers will always lead to failure. Building strong supplier relationships ensures timely replenishments.
• Sudden spikes in demand occur when marketing campaigns or trends go viral. Lack of demand planning results in a rush to replenish products, causing operational and financial strain on the company.
• Administrative inefficiencies can quietly drain productivity. Retail managers lose over five hours a week fixing mistakes or chasing approvals, time that could be spent preventing stockouts and keeping shelves full for customers.

Practical Steps on How to Prevent Stockouts

The most effective way to prevent inventory stockouts is to adopt a structured approach to optimize forecasting, inventory management, and other supply chain processes. These are the key steps to follow:

1. Strengthen demand forecasting for accurate planning.

Analyze historical sales data, seasonal trends, and market changes to anticipate demand fluctuations. Aside from collaborating with sales and marketing teams, these Artificial Intelligence (AI)-driven business tools can improve accuracy:

• Machine Learning (ML) algorithms analyze massive data sets to identify patterns and relationships that humans might miss.
• Natural Language Processing (NLP) reviews customer feedback, social media sentiment, and economic reports to predict future demand.
• Computer vision (i.e., cameras) installed in retail stores tracks customer traffic and behavior, providing insights to optimize inventory.

2. Implement real-time stock monitoring and analysis.

Identify potential stockouts before they happen by conducting routine audits to track stock movement and control inventory. While setting up automated alerts for low stock levels can avoid stockouts, considering these Key Performance Indicators (KPIs) is vital:

• The inventory turnover ratio measures how often the inventory is sold and replaced and identifies slow-moving items.
• Days on Hand (DOH) is the average number of days to sell an inventory, helping assess liquidity.
• The sell-through rate is the percentage of inventory received from suppliers and bought by customers.
• The backorder rate is the percentage of orders that can’t be fulfilled due to stockouts.
• Carrying costs measure the amount spent on holding inventory, including storage, insurance, and opportunity costs.

3. Maintain safety stock as a contingency buffer.

A buffer inventory is a safeguard against unexpected demand spikes or supplier delays. Carefully calculate the safety stock based on past demand patterns and supplier lead times. This is the most common formula for balancing holding costs and reliability:

Safety Stock = (Maximum daily sales * Maximum lead time) – (Average Daily Sales * Average Lead Time)

4. Strengthen supplier relationships for reliable replenishment.

Reduce the risk of supply chain disruptions and delayed restocking during high-demand periods by fostering a good relationship with suppliers. Here are some best practices under this step to prevent stockouts:

• Establish clear lead time agreements and emergency supply plans.
• Use vendor performance tracking solutions to evaluate efficiency and reliability.
• Minimize dependency on a single source by diversifying suppliers.

5. Optimize inventory management systems for efficiency.

Streamline inventory operations to increase efficiency and minimize human errors. Utilizing inventory management systems or Enterprise Resource Planning (ERP) solutions will automate relevant processes. These tried and tested inventory techniques can also help:

• ABC analysis categorizes inventory based on value and consumption, where A is high-value and fast-moving, B is moderate, and C is low-value and slow-moving.
• FIFO (First In, First Out) is crucial for perishable goods or items that can become obsolete.
• EOQ (Economic Order Quantity) calculates the optimal order size to minimize total inventory costs, helping businesses find the sweet spot between placing frequent small orders and large sporadic purchases.

6. Use Just-in-Time (JIT) inventory strategies carefully.

Considered one of the most effective inventory management techniques, JIT inventory management reduces excess inventory while ensuring stock availability when needed. This should only be applied in the following cases:

• Industries with perishable goods or short product life cycles (e.g., food and beverage, tech, etc.)
• Industries with predictable demand and reliable suppliers (e.g., automotive and electronics)
• Businesses with limited storage space, such as small retailers and construction sites
• Companies focused on lean manufacturing and waste reduction
• Businesses with strong supplier relationships and efficient logistics

7. Leverage advanced technology for supply chain optimization.

Optimizing the supply chain enhances decision-making, reduces manual efforts, and improves overall efficiency. These are some must-haves in the company’s tech stack:

• AI and machine learning for predictive analytics reduce guesswork in forecasting and resource allocation across the supply chain.
• Radio-Frequency Identification (RFID), Internet of Things (IoT), and blockchain increase end-to-end visibility, helping businesses pinpoint bottlenecks, prevent theft or counterfeiting, and quickly respond to disruptions.
• Warehouse automation (e.g., robots for packing and shipping, guided vehicles)   speeds up order fulfillment and optimizes warehouse space.

 

How to forecast demand to prevent stockouts