How to Accurately Forecast Holiday Inventory

It’s already that time again—the season retailers count on to round out a profitable year. With the winter holiday season being so vital, it’s a no-brainer that an accurate forecast is paramount.

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Multichannel Merchant
Multichannel Merchant
Multichannel Merchant
O+F Operations and Fulfillment

By this time of year, promotional goods orders are already in process, particularly for those that are sourced overseas. But what about the many SKUs that can be sourced domestically, or even locally? For these shorter lead-time SKUs, there’s still time to act before the mad holiday rush—and to do it profitably.

The key is taking your forecast accuracy to the next level.

A better forecast means a happier bottom line
You’re well aware that properly forecasting for the SKUs you sell means you have enough inventory on hand to accommodate anticipated demand. An inaccurate forecast could mean you’re ordering too little product, which results in lost sales, lost revenue, and a very unhappy holiday season.

The demand forecasting engine in your inventory optimization solution should employ the appropriate forecasting models to deal with the entire spectrum of demand behavior from slow moving, intermittent to lumpy demand, seasonal demand, trending demand and everything in between.

The fall and winter holidays are on a repeatable seasonal pattern from one year to the next. These fluctuations and seasonal variances must be accounted to ensure forecast accuracy. Caution: A bad seasonal profile is worse than no seasonal profile at all.

Better forecast accuracy leads to less forecast variance or error and better in-service. The goal is to streamline the process of reviewing demand forecast exceptions so that the buyer or analyst is only presented with exceptions that impact inventory. To see the impact a truly accurate forecast has on the bottom line, let’s look at a simple example:

Let’s say an A-class SKU is responsible for 1.5% of the total annual revenue dollars. In XZY’s $1 billion company, that means the SKU brings in roughly $15,000,000 annually, or about $41,096 a day.

In reviewing the SKU’s history, we find we have been out of stock on this product roughly once every two weeks, resulting in 26 days of lost sales in the past year. If we can improve our forecast, we can cut the number of days out of stock and lost sales in half, which increases our selling window by 13 days.

In this example, we increase the revenue of this single SKU by $534,248 a year. All because we improved our forecast and became more efficient, we also improved our service level in the process.

Dynamic transfers increase service levels for happier holiday shoppers
Another way to increase profitability during the holiday season is by transferring overstock to another store based upon demand. Even the most accurate forecast based on data from previous years may not account for sudden shifts in demographics or buying patterns due to external forces—like a big snowstorm or other dramatic weather event.

By using inventory optimization tools, you can continually balance and re-distribute inventory for the greatest impact on the bottom line. At the same time, you can provide the highest level of service and increase loyalty by always having the right product for the right customer at the right time. And more happy holiday shoppers means a jollier bottom line for all.

Increasing the accuracy of your holiday forecast—even for shorter lead-time SKUs—doesn’t have to turn you into a Grinch and can actually lead to bigger profits. Plan now to leverage the latest inventory optimization tools and advanced demand forecasting methods to squeak out more profits and help you round out a profitable 2012.

Rodney R. Daugherty is senior director of product strategy at Manhattan Associates.

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