Do you run an eCommerce business on Amazon?
If so, you’re likely well aware that product demand on the marketplace can fluctuate. Sales can ebb and flow due to seasonality, market shocks, discounts and promotions, changes in consumer behavior, and more.
When this happens, a seller’s job becomes a tricky juggling act, especially when it comes to balancing cash flow and stocking levels. And to make matters worse, changing demand tends to create a bullwhip effect that travels up the supply chain, which only magnifies inventory issues.
So, how can you mitigate these problems and prepare for future customer demand fluctuations?
Here, demand forecasting is an invaluable tool for your business. Let’s discuss what it entails.
Sometimes referred to as inventory forecasting, this is a business process wherein an eCommerce retailer estimates how much inventory they need on hand to meet consumer demand as it fluctuates over time. It leverages historic sales, market trends, and industry experience to estimate optimal inventory levels.
While that may sound complex, the demand forecasting method is about finding harmony.
By practicing demand forecasting, you can find an equilibrium—the optimal boundary range.
So, what do you need to take to start forecasting your inventory? Here are some tips:
For starters, you’ll need to identify the forecast boundaries. That begins with the time period the forecast will cover. Generally speaking, an Amazon seller will do a 30 or 90-day forecast, although in some cases, the forecast could extend over the course of a year (we recommend against a full year for inventory buying purposes). Whatever your time period, be aware that the farther out from today the forecast stretches, the less precise it will be.
After selecting a time frame, your next task is to estimate the base demand levels. Here, leveraging historical sales data and understanding what sales forecasting is, can help you improve demand forecast accuracy. Additionally, you may need to factor in the inventory turnover rate and the manufacturing production cycle.
There are numerous variables that can impact a product’s future demand fluctuations as well as optimal stocking levels, including:
As a general note, outlying events shouldn’t be included since they’re statistically anomalous.
Not all products share the same demand and sales velocity. And that’s true even for analogous products. For instance, eyeglasses may be sold all year round, whereas snow goggles tend to be more closely tied to the winter months. They may serve similar purposes but still have wildly different demand fluctuations.
Knowing this, it’s better to create separate inventory or demand forecasts for products or product categories. Treating all inventory items as if they were the same will likely render your forecast meaningless.
If you’re working with a new product, you won’t have historical sales data to leverage. This makes a process that is already subject to conjecture even more reliant on guesswork. That said, you can minimize the speculation by performing the following actions:
Demand forecasting accuracy relies on a wealth of data points. Manually gathering, categorizing, and then making sense of that data is a massive undertaking. But with the help of inventory management systems like Crystal, the process becomes much easier.
Crystal is an Amazon-approved application that leverages your historic sales data to create a boundary range of potential demand levels. This makes it possible to identify your understock and overstock levels, as well as the optimal equilibrium range.
With so much saturation on Amazon, sellers need to do everything in their power to gain a competitive advantage. And with the help of demand forecasting, your team can find an ideal balance between cash flow and inventory levels, to better plan a seamless budget vs forecast.
Want to enhance your forecasting?
Crystal is the solution. It’s a tool for Amazon FBA business to create confidence over what is usually a nebulous process.
How does it work? Check it out to see for yourself.
Discover opportunities. Maximize your sales. Grow your Amazon business!