There are two big questions any purchasing department needs to answer:
- When should you reorder more inventory?
- How many units should you order?
When you act as the purchasing department, the marketing department, and the sales department, it's difficult to find the resources to determine this on your own. Zentail's Demand Forecasting tool is designed to give you all the tools necessary to make this a simple decision. Taking it one step further, we suggest an Optimal Reorder Frequency for you based on the (Q, r) model.
Using historical sales data for your SKUs, taking into account lead time and holding cost, Zentail's Demand Forecasting tool calculates all of the most important metrics for your catalog. This article will review how to access and use the Demand Forecaster, how to interpret each metric, how the Demand Forecasting tool plugs into Zentail’s other Inventory Planning features and answer some frequently asked questions.
- Accessing the Demand Forecaster
- What is the Forecast Summary?
- What is the Products Table?
- Deep Dive on Per-SKU Forecasting
Accessing Demand Forecasting
You can access the Demand Forecasting tool by hovering over the Inventory tab and then selecting “Demand Forecasting” under the Planning section. The first thing you'll notice is the Forecast Summary. Below that is a Products table (you can also download this table to a csv). Clicking on a SKU within this Products table opens up a detailed chart with further information for a given SKU.
This is a visual representation of your catalog through a segmented bar chart. Your catalog is broken down into five segments according to how many days in inventory you have in stock. The five segments are:
- Less than 1 day
- 1 to 7 days
- 8 to 30 days
- 30+ days
- Not enough order data
In most situations, you'll want to minimize the number of SKUs that have less than 1 day in stock. SKUs are categorized as having "Not enough order data" if they've never had any sales.
You can click on each segment in the Forecast Summary to reveal those SKUs on your Products table.
This section gives you a view of your SKUs within a certain segment, and displays some of the most important metrics for reordering. This can also be downloaded to a csv.
A description of the headers in this table are as follows:
SKU - This is the SKU (not exciting)
Vendor - This is the vendor associated with that SKU
Lead Time - Lead time is the number of days from when you place an order until it actually arrives at your warehouse. This value can be set on a SKU or Vendor level, with the SKU setting overriding the Vendor setting.
Units / Day - This is the sales velocity of your SKU, or how many units per day we expect you to sell based on your most recent sales for that SKU. We only calculate sales while that SKU is in stock (meaning if it goes out of stock, we won't recalculate its sales velocity until it comes back in stock).
In Stock - This is the total inventory available for this SKU. It includes inventory across all warehouses.
Days to Stock Out - This calculates how many days of inventory you have for that SKU given the current sales velocity and in stock inventory.
Inbound - This is the amount of inventory you have in inbound shipments to your warehouses
Next Arrival - This is the expected arrival of the next inbound shipment.
Order Quantity - This is the amount you should order for a given SKU once your inventory reaches, or falls below, the reorder level.
Days to Reorder - This estimates how many days will go by before you need to place an order for that SKU. It is calculated based on your sales velocity and the amount in stock. For example, if you have 100 units in stock, your sales velocity (units / day) is 10 units per day, and your reorder level is 50, we estimate it will be 5 days until you have to reorder this SKU.
If you are interested in seeing the breakdown of the different components and calculations that go into the (Q, r) model as well as a graph of the optimal times to reorder, clicking on a SKU will open up a detailed analysis for that SKU. It will also reveal buttons so you can take action directly within this page to create a PO to reorder that SKU.
Reading the Graph
The graph displays the past sales velocity of the SKU (in the solid blue line) as well as the forecasted demand for the SKU (the dotted blue line). The horizontal red line is the optimal reorder at quantity (based on sales velocity and vendor lead time), and the green shaded areas are the anticipated time it takes your vendor to deliver your product
Calculations Break Down
If you are interested in learning more about this breakdown we recommend taking a look at this paper explaining the (Q, r) forecasting model. However we do recognize there’s a lot of math (including calculus) happening in that paper so here’s the high level info you need to know:
1. The aim of this model is to minimize your cost
2. There are 3 main drivers of cost
-- Fixed cost (this is the cost of ordering your inventory)
-- Stock out cost (how much profit you are losing per day when you don’t have inventory to sell)
-- Holding cost (how much your current inventory depreciates in value over time)
3. Sales velocity changes, so you can’t rely on a simple model that assumes demand is constant to predict when to reorder and what amount to reorder
4. Sometimes the optimal sales velocity is not every 30 days or once a month, this model allows for more dynamic modeling of reorder cycles, so you can minimize cost (see point 1)
You might have noticed there are two buttons on the right hand side, a “Snooze” button and a “Create PO” button.
Snoozing removes the SKU from the Demand Forecasting page for the period you specify. The Snooze button is good to use if you know you are discontinuing an item (you can “Snooze Indefinitely”) or you know your vendor is not able to fulfill your order this week or month. Snoozing allows you to ignore the SKUs you do not wish to fulfill or cannot fulfill at the moment, so you can focus on the SKUs you are actually interested in.
The “Create PO” button will be blue if you have a vendor filled in for that SKU. If you do have a vendor filled in, you can click that button and a PO will automatically be created for that vendor with our PO feature with the Order Today Quantity filled in. If from this page you add more than one SKU for a vendor, the additional SKUs will be added to that vendor’s PO, so you have one draft PO per vendor. Learn more about the PO feature here!
How can I make this model more accurate?
Zentail only knows the information you have filled in for your SKUs. If you haven’t already, think about filling in the cost of the SKU, as well as that SKUs vendor and that vendor’s lead time (lead time defaults to 14 days). This will ensure that Zentail has the critical information to make this screen both more accurate and more actionable. Additionally, if you have sales channels that are not supported by Zentail and they are driving your sales velocity, consider adding those channels through Zentail's Open API or by creating manual orders.
What do I do about all my SKUs that fall under “Not enough order data”?
These are SKUs selling very slowly or not selling at all, so Zentail cannot determine the sales velocity for these SKUs. It is a good hint that the inventory for those SKUs might be growing stale, and you may want to make more aggressive moves to discount or liquidate that inventory to free up capital for more popular and profitable SKUs.