Why Forecasting Inventory Levels Is Vital in Today's Economy

August 4, 2024

At present, the economy is growing at a rapid pace, with business operations feeling the winds of change in the form of changing demand, supply chain disruptions and evolving customer expectations. One of the essential requirements of running a business is forecasting inventory. The ability to forecast inventory correctly can improve a company's market positioning by meeting demand, reducing costs and allowing for comparative advantage. The primary method of inventory tracking for most businesses, especially small and medium enterprises, is Microsoft Excel.

In this article, I will be sharing the importance of inventory forecasting and how to use Excel spreadsheets to manage inventory effectively.

Understanding Inventory Forecasting

Inventory forecast is the process of anticipating future requirements for stock based upon past experiences, market trends, seasonal factors and other relevant information.

This is necessary as stock control is a critical component of every business as even a slight error in the level of stock can lead to substantial losses for the company.

For instance, if the company has too much stock, the business would run the risk of customers thinking that the product is out of fashion, whereas if the company has too little stock, it would lead to the risk of the company not fulfilling the orders made by customers.

Thus, a good inventory forecast would result in positive cash flow, minimize holding cost and increase customer satisfaction.

The Importance of Inventory Forecasting in Today's Economy

1. Adapting to Market Fluctuations
   In an environment of fast-moving markets, businesses need to be nimble and agile, flexing with fluctuations of demand. Inventory forecasting allows businesses to react to such changes in demand and re-order their inventory levels in time, so they neither run out of stock (and lose customers) nor are left with undue excess inventory (which ties up capital and incurs costs of storage).

2. Optimizing Supply Chain Management
   Supply chain disruptions have become more frequent due to events beyond our control, such as pandemics, or natural or man-made disasters. Effective inventory forecasting helps businesses to identify bottlenecks in their supply chain, and to prepare alternative sourcing strategies in anticipation of when these disruptors are likely to occur. This enables businesses to avoid the shutting down of the supply chain.

3. Enhancing Customer Satisfaction
   In this kind of market, where customers can shop around, businesses have to focus on the satisfaction of their customers. When an item is out of stock and no instant delivery service is available, the customer definitely won't be happy about it. Therefore, by forecasting the inventory levels, a business can avoid such a situation and satisfy their customers by having the products people want when they want them.

4. Reducing Costs Effective
   Inventory forecasting can help to reduce the cost of running a business, by reducing the emergency orders that can be costlier, by reducing holding costs through avoidance of stock build up costs, by improving the efficiency of warehouse space and labor.

5. Supporting Data-Driven Decision Making
   Inventory forecasting models are developed using data from inventory-cycle measurements. This data-centric approach to prediction enables the business to model its future inventory needs with greater detail, and this, in turn, can be used to help with other strategic decisions, including marketing or product development, which themselves rely on informed decisions based on accurate data.

Tracking Inventory in Excel: A Practical Solution

For many businesses, especially start-ups, the prospect of investing in high-end inventory management software might be far-fetched. In such cases, it is perfectly feasible for companies to track inventory in Excel templates, a tool that is affordable and flexible enough to be customized.

How to Track Inventory in Excel

1. Set Up Your Inventory Spreadsheet

   Your first step is to create a spreadsheet with the relevant columns. Relevant columns include:

   • Item Name
   • Item ID/SKU
   • Description
   • Quantity in Stock
   • Reorder Level
   • Lead Time
   • Supplier Information
   • Cost per Unit
   • Sales Data

2. Use Formulas and Functions
   Excel offers a variety of formulas and functions that can simplify inventory management.

   For example:

   • SUM: Calculate total quantities or costs.
   • IF: Create conditional statements to flag items that need reordering.
   • VLOOKUP: Retrieve information from other sheets or tables.
   • COUNTIF: Count the number of items that meet certain criteria.

3. Implement Conditional Formatting
   Conditional formatting can be used to draw attention to important information, such as low stock levels or items that need to be reordered. To make these items stand out, use color-coding.

4. Create Pivot Tables
   Pivot tables order and summarize large amounts of data and can help you to track sales trends, follow stock levels and identify inventory etc.

5. Automate Data Entry
   You can reduce time and error by automating data entry. For example, using Excel's data validation features can create drop-down lists and ensure consistent data entry. Consider using Excel Import Data features, or creating your own macros to automate repetitive tasks.

6. Regularly Update and Review Your Inventory Data
   Your inventory data must be current if your forecasts are to be accurate. Check your spreadsheet regularly, update your figures if the stock level or sales, and so forth, are changing, and perform periodic audits.

Advantages of Tracking Inventory in Excel

1. Cost-Effective
   It's handy for keeping stock since it allows you to keep track of spares and inventory levels, and proves to be very useful in businesses that do not have too much of a budget. Excel is less expensive than other software and still has all the bells and whistles.

2. Customization
   Your business can also design an inventory management system that's exactly right for the way you need to run your business. Because you create your own spreadsheet, you're free to select the fields and features that are most relevant to you.

3. Ease of Use
   It is easy to implement and cheap to use, so if you already know how to use something like Excel, there is no steep learning curve. It also has the advantage of being intuitive; if you understand inventory, it is easy to know what information to track. Another advantage is the wide range of online resources and tutorials.

4. Flexibility
   Thanks to Excel's spreadsheet feature, you have the flexibility to organize and monitor your data according to your convenience. If your business gets larger, and your inventory management changes, you can simply adjust your spreadsheet accordingly.

Limitations of Tracking Inventory in Excel

Though Excel might be a great tool when you have to take an inventory of your products, it still has its limits. And as your business grows, you might come across some issues, like these:

1. Scalability
   The more you are using Excel to manage your inventory data, the harder it is to keep track of all the numbers and the bigger the risk for mistakes. For a bigger business, investing in a more advanced inventory management software can help.

2. Collaboration
   No, Excel is not the ideal solution for team management of inventory, especially if several team members need to view or edit the same spreadsheet at the same time. Cloud-based inventory management solutions would provide better collaboration features.

3. Integration
   Excel doesn't sync with other business systems, like accounting software or e-commerce and point-of-sale systems; data can only be copied manually from one system to another, creating silos and greater inefficiencies.

4. Real-Time Data
   Excel is not really made for that type of use. If you want that real-time visibility to your stock levels, you might want a slightly more sophisticated real-time inventory management system.

Conclusion

Forecasting the correct inventory level is an important decision as the competitive supplies market changes rapidly. Although advanced software can be used for inventory management, tracking inventory in Excel is a cost-effective solution for small and mid-scale companies.

One of the reasons for this is that inventory management software is expensive while management on Excel can be done with the spreadsheet's native functions. The given business data is about selling handicrafts. In column A we can see the inventory number, column B records the inventory requirement, and in column C we see the actual inventory amount.

To begin with, we need to data-analyze the excel file in order to determine two important dynamics.

Supply:

Let's say the supply-demand value per week is 50 handicraft items.
In other words, the company needs to produce 50 items to meet the market demand per week. Looking at row number 13, we see that demand exceeds supply, making it 4.
Similarly, we can see other instances when the trend is reversed, making it -2 and -3.
Let's look at row number 16, where the trend is positive again, and the company needs 1 handicraft item.
The second most important dynamic is the inventory level.
On average, it fluctuates between 2 and 4 handicraft items. The important factor is to ensure that stocks do not go below zero. This is why our department decided to improve our logistics so that our deliveries arrive on time, aligning with the market supply and demand dynamics. Besides, staff shortage is another issue we need to tackle to ensure proper inventory management.

When your business is larger, it is worth investing in better tools that support your maturing inventory management needs to secure long-term success.