Forecasting is part mathematics and part art, and due to this, it can be extremely complex, but even simple forecasting can be very valuable. Many vendors get too tied in a knot over the complexity of item and store level forecasting and then nothing gets done. We encourage all vendors to start with the basics and increase the sophistication of your model over time. Forecasting will provide you with critical information necessary to avoid stock outs and maximize your retail sales. And if you do it right, you can gain a critical advantage over your competition and demonstrate to your buyers that your company is working hardest to be a good partner.
There is a simple process for forecasting.
1. Sum the units sold for the most recent 5 weeks.
2. Sum the units sold for the same period last year.
3. Calculate the percentage change in units sold.
4. Sum the units sold from the current week forward 16 weeks last year.
5. Adjust the 16 week total to current year demand by multiplying times the calculated percentage change.
6. Divide the adjusted 16 week units sold by 16 to get an average weekly forecasted units sold.
7. Calculate a weeks of supply on hand by dividing the current on hand by the weekly forecasted units sold.
The forecast can be customized to your business by adjusting the base for the foundation (5 weeks above) to be longer or shorter depending on how heavily seasonality or promotional activity affects your sales. E.g. shorten the period if your business is highly seasonal and lengthen the period if your business is primarily replenishment with little variability. You can also adjust the current on hand value by adding any in transit inventory so you don’t overstock.
Now that you have a good idea of the forecasted weeks of supply, you can use this value to make inventory production decisions. Each vendor’s lead time to produce and land product at a store will vary, so you will need to determine your target weeks of supply and take appropriate action.
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