Are demand forecasting and inventory forecasting the same?

The short answer: no, they are not:

  • Inventory forecasting is predicting the quantity, timing, and placement of products in expectation of servicing customer demand
  • Demand forecasting is predicting the product, time, and place to satisfy a customer’s need

Know your forecasts

Nearly everything in business is responding to signals. The primary signal is that of customer demand.

  • Which products do they want to purchase?
  • How many of those products?
  • When will they purchase them?
  • How and where will they want them delivered?

Stocking in response to that is critical for the supply chain, as (in most cases) you can’t sell what you don’t own or haven’t locked down for procurement.

  • How much do I need versus how much do I already own?
  • When do I cut orders based on lead time?
  • What size are those orders based on my contracts?
  • Based on the demand forecast, when must it be in my warehouse?

There is a strong chicken-and-egg response between what the customer wants (demand forecasting) and how you will address it (inventory forecasting). Both inventory forecasting and demand forecasting are unique plans within the business, vital and interconnected.

A tale of two forecasts

Demand forecasts and inventory forecasts are interconnected but create distinct views of the business for different audiences to consume. While the inventory forecast is derivative of the demand forecast, its purpose in planning is unique.

Always start with the demand forecast 

The demand forecast is also referred to as the independent forecast. 

This is what, where, and when the customer wants to purchase products. Demand forecasting is largely out of your control. You can influence it with marketing. It can shrink or grow based on market conditions. But generally, consumer needs will be what they are.

Your firm needs to approximate what your customer wants from your business. This is a combination of past demand, rate of growth, analysis of existing product demand and new product estimates, and many additional factors. The output is: how much do I expect to sell by product, by time period X?

Who uses demand forecasting data?

In most businesses, this function is called a Merchant or Buyer. They will take the forecast as given or adjust it based on their sense of the market, balancing tribal knowledge known as the derivative forecast, dependent forecast, or other nuances not captured by the system. The final action is to create purchase orders to stock the warehouse and retail stores.

Demand drives inventory forecasting

The inventory forecast is also known as the derivative forecast or dependent forecast. This is because it must be built from the results of the demand forecast.

Inventory forecasting looks at the timing of demand – when will the product sell? 

It considers when purchase orders are due and when inventory replenishment needs to happen.

Your inventory forecast can sell to zero for products you plan to discontinue.

It is also used to forecast the capacity of warehouses that are owned and accessible.

Based on the flows in and out, the operations team might consider procuring temporary off-site warehouse space for a fixed duration or deciding whether the product should shift to a 3PL permanently to free up primary locations.

Who uses inventory forecasting data?

The Operations Team will want to know how full their building will be over time and plan for receiving, putting away, maintaining, and disposing of that inventory. This includes planning out the labor needed to perform these tasks. There will also be a balancing act with previously overstocked, aging, and obsolete inventory.

It could inform Operations in cases where the forecast shows you need (or will need) more warehouse space than you have – say, for peak season. A buyer for 3PL services could receive this forecast and benefit from it. 

A plan comes together

The difference between inventory forecasting and demand forecasting should be clear. Their forecasts are unique but interconnected. While the demand signal is generated based on the best information available, it needs to be transformed into actions reflected in the inventory forecast, driving actions from the part of the business that executes for the customer.

Learn how we’ve uniquely integrated omnichannel planning and fulfillment software in one robust cloud platform.