For retailers in every industry, few things are more important than accurate demand forecasting. Yet, few retailers are good at producing forecasts that add value to their organizations.

Why is this?

The Need for Better Forecasting

Accurate demand forecasting isn't easy, but that doesn't mean it should be avoided. As the saying goes, nothing good or worthwhile in life comes easy. For starters, improved accuracy results in lower inventory levels and fewer carrying and holding costs.

"Better forecasts also ensure that the right product is in the right place at the right time, delivering improved customer service levels and reducing the need for fire-fighting and expediting," Demand Solutions explains in a white paper on the topic. "In these days of complex and extended supply chains, increasing forecast accuracy is a competitive necessity to achieve top-line growth as well as bottom-line profitability."

Five Ways You Can Improve Forecasting Accuracy

Nobody doubts the importance of better forecasting, but few organizations have a clear understanding of how they can make improvements.

So, let's take a look at a few tips.

1. Understand What Drives Forecasting

Many companies assume that forecasting is built on sales, when it's actually built on demand. Sometimes the difference between sales and demand is minimal, but you can get yourself in trouble by forecasting based on your sales.

To illustrate why this is such a fatal flaw, consider a situation in which you run out of a particular SKU for three months. Because the SKU isn't on your shelves, there are zero sales. If you use sales data, you would then assume that there's no demand for the item, and would stop carrying it. Does that make sense? Instead, forecasting should always be based on demand.

2. Integrate the Right Inventory Management System

Forecasting accuracy is always tied to inventory management. If you want to forecast well for the future, then you need to have a clear understanding of what's happening in your warehouses and on the sales floor. Build the right system by focusing on both the right software and hardware. There are a lot of choices, so carefully vet each option before making a decision.

As supply chain expert Paul Trujillo says, "Asking the right questions prior to investing in an inventory management system for your small business is essential to get your business on track now and to set it up for profitable growth in the future."

3. Rely on Objective Data

There's certainly value in leveraging salespeople and employees to figure out which products are in high demand and which ones are no longer popular, but take everything you hear with a grain of salt.

You can get in a lot of trouble by relying on subjective information. Instead, make sure you're basing all of your forecasting on objective data. This removes emotions and personal biases from the equation.

4. Look Beyond Your Company

Demand forecasting primarily deals with your organization, your products, and your customers - but sometimes it reaches beyond this scope. In certain situations, you must be willing to look beyond your company.

For example, do you really think that demand will be the same for a $600 designer dress if the economy goes into a sudden tailspin? Probably not. Instead, demand for that dress will likely decrease, and demand for the $100 off-brand will probably increase. Accounting for external conditions will keep you honest.

5. Incentivize Employees

Sometimes employees don't fully commit to demand forecasting because they don't understand the far-reaching consequences. One quick way to help them understand is by tying forecasting accuracy to employee compensation and benefits.

"Companies can incentivize employees to create accurate sales forecasts by including benefits for sales forecast accuracy in compensation plans," expert Carolyn Jenkins explains. "This can create a culture that prizes accurate forecasting and boost an organization's overall sales."

Don't Delay Any Longer

Poor inventory demand forecasting might not sink your business this month - or even this year, for that matter - but it will ultimately come back to hurt you. Should you delay any longer, you'll end up regretting your passive stance on forecasting.

Heed the aforementioned tips and get to work!