Every Friday, we answer a common question about fulfillment, shipping, or business. This week’s question comes from one of the fans who entered our giveaway contest for a copy of the board game Gloomhaven. Today we will answer the following question: “how do you know how much inventory to buy?”
When you have a business where keeping inventory in stock at all times is vital, you have to figure out how much inventory to buy. This can seem like a daunting task, but there are several different methods you can use to estimate inventory needs. We’ll talk about them in this week’s post.
What is Demand Estimation?
Demand estimation is how you measure changes in consumer behavior due to changes in the price of a product, changes in a consumer’s income, and other variables that impact demand.
There are several key benefits to demand estimation, aside from inventory predictions. Demand estimation helps with financial forecasts, your business plan, sales and promotion strategy, as well as giving you more peace of mind. Yet without demand estimation, you cannot determine your inventory needs.
So how do I know how much inventory to buy?
There are many methods to estimate demand as it relates to inventory. Today, we are going to focus on three simple ways you can use demand estimation to know how much inventory you need to buy.
- Look at your past data to get an idea of how much you need.
If your business has been up and going for a while, tap into your past sales data to get an idea of how much inventory you need. This method isn’t flawless, as it doesn’t give you accurate information on what the current market looks like. You simply see what the data looked like in the past for your business. Even still, past sales revenue can be a good predictor of how much inventory you need to buy.
- Check publicly available data.
If your business is just getting going, and you don’t have the ability to check your own sales data, use publicly available data through sources such as the Small Business Administration. This can be incredibly useful for getting an idea of how much inventory you need. Through publicly available data, you can see how the market is doing, giving you a clearer image of how much inventory you need.
- Ask an outside expert.
Don’t know where to start? That’s okay. Seek out an expert to help you understand what the demand for your product is. They have the tools, knowledge, and ability to help make sense of what data you do have, and give you an idea of what you need if you lacking past data.
Having a clear image of what the market looks like is the first step to understanding how much inventory your business needs. Through the methods listed above, as well as many others, you can begin to understand how much inventory you need to keep scaling and growing your business.