It’s Thanksgiving Day, and you’ve channeled your inner Monica Geller to cook the perfect Thanksgiving dinner for your friends.
Just as the meal begins to come together, you realize, there’s no turkey.
Now, picture your business as that Thanksgiving dinner and your inventory as the ingredients. Without proper planning, you find yourself with a recipe for disaster.
Just like cooking, inventory forecasting and demand planning are essential for making sure your eCommerce business runs smoothly. Without accurately predicting what you need, when you need it, and how much, you risk stockouts, overstock, and missed revenue.
In this guide, we’ll cover everything you need to know about inventory forecasting and demand planning; its benefits, the steps involved, and the best tools to help you succeed.
Demand planning and forecasting is the process of figuring out what products customers will want to buy in the future, and how much of each product/SKU you’ll need to have in stock.
It helps you prepare for future sales by estimating demand ahead of time, so you can have enough inventory to meet customer needs, without stock imbalances.
While demand planning and forecasting are closely related and used interchangeably, they are slightly different.
Demand forecasting involves using historical data, market trends, and seasonality to estimate future demand for a product. It focuses on using an inventory forecasting formula to answer the question:
“How many and which products will customers want and when?”
Demand planning meaning, on the other hand, is a broader, more strategic process that builds upon forecasting.
It involves taking the forecasted demand and creating an actionable plan to meet it without any surprises.
This includes coordinating with different teams, adjusting production schedules, managing inventory levels, and aligning resources.
In short, demand planning and forecasting go hand in hand. While forecasting helps predict what customers might want in the future, demand planning takes that forecast and turns it into action.
For instance, demand forecasting in the apparel industry might predict a spike in sales for pastel-colored dresses in spring.
Demand planning ensures the right quantities are produced, shipped, and stocked at the right locations to meet that demand.
Planning ahead is beneficial, whether it's for inventory or a vacation.
Just like planning your itinerary saves time and money, demand planning and forecasting help you stock based on customer needs, helping you
Nothing’s more frustrating than losing sales because a bestseller is out of stock.
Customers get disappointed and move to your competitors while you miss out on revenue. Forecasting inventory and reordering based on a demand plan gives you adequate stock to keep customers happy and sales flowing.
On the flip side, shelves full of unsold products are just as bad.
Ordering too much freezes your cash, takes up space, and often leads to heavy discounts just to clear it out. With demand planning and forecasting, you’ll stock just the right amount, keeping your cash flow healthy and your storage space efficient.
Simply put, demand planning and forecasting allow you to strike the right balance between supply and demand.
Demand planning and forecasting help businesses save costs across multiple aspects.
By reducing excess inventory, companies save on storage, handling, and markdown costs. Simultaneously, avoiding stockouts minimizes lost sales and the need for costly last-minute restocks.
Plus, efficient planning allows for better production scheduling and resource allocation, reducing wastage.
When you know what you need ahead of time, so do your suppliers. That means fewer last-minute POs, better negotiations and terms, and a smoother supply chain overall.
Moreover, suppliers prefer working with businesses that plan well as it makes their job easier too.
Customers love it when they can find exactly what they’re looking for, and demand planning ensures that it happens more often.
By keeping shelves stocked with the right products at the right time, you keep your customers happy and coming back for more.
Trends change fast. Timely forecasting and demand planning allow you to quickly spot patterns and adapt to market trends, seasonality, and unexpected changes.
This way, you can launch new products at the right time, capitalize on emerging opportunities, and stay ahead of competitors.
At a high level, the demand planning process consists of three core steps: data collection, analysis, and interpretation. These drive the entire process so that you can predict demand accurately and take the guesswork out of your inventory decisions.
The demand planning process starts with gathering relevant data which includes past sales, market trends, customer behavior, and external factors like seasonality.
The quality of your forecast depends on the accuracy and completeness of this data.
After collecting the data, the next step is to analyze it for patterns, trends, and fluctuations. This helps you find correlations within the data to inform future demand.
This phase also includes essential tasks like cleaning, validating, and normalizing data for accurate analysis.
Once the calculations are complete, the analyzed data is broken down to create forecasts and recommendations that guide your next steps in demand planning.
During this phase, you also closely collaborate with different teams to cross-check if the forecasts align with business capabilities and KPIs.
This is just a broad overview of how the demand planning process works.
In the next sections, we’ll be breaking down the methods, tools, and best practices for effective forecasting and demand planning.
While there are many different forecasting techniques available, below are some of the most reliable, tried-and-tested, and widely used methods by Shopify eCommerce businesses.
This demand forecasting method relies on collecting feedback from customers, suppliers, and other market participants to predict future demand.
Surveys, interviews, and focus groups are commonly used to gather qualitative data.
How to apply
The quantitative demand forecasting method uses historical data and statistical techniques to predict future demand.
This technique is data-driven and is best for stable markets with consistent demand patterns.
How to apply
The Delphi method relies on a panel of industry experts who provide their individual opinions about future demand.
These experts are asked to make forecasts independently and then discuss them in rounds to reach a consensus.
How to apply
This method gathers input from the sales team, who are closest to customers and market trends.
Salespeople provide their estimates of future demand based on their direct interactions with customers and their understanding of the market.
This method is effective for businesses with strong customer relationships and experienced sales teams.
How to apply
Algorithm-based forecasting uses advanced tools and software, like Prediko that apply AI algorithms to analyze historical data, seasonality, and growth trends to generate precise demand predictions.
These tools handle large datasets and complex variables for creating highly accurate forecasts. They can identify subtle patterns that might be invisible to human analysts.
How to apply
Prediko does all the heavy lifting for you with its AI demand planning. Simply input your annual sales target, and it analyzes past sales, seasonality, and growth trends to distribute the target across 12 months. You can then edit the plan based on your own insights and judgment.
Accurate demand forecasting requires a structured approach. Here’s a step-by-step breakdown to help you get it right.
The first step in demand forecasting is gathering sales data for at least the past 12-24 months (or longer if available) from all relevant sales channels.
Decide on the appropriate level of detail depending on your business nature (daily, weekly, monthly, quarterly).
Higher granularity (e.g., daily) can capture short-term trends but may also introduce more noise.
Clean the data to remove errors, inconsistencies, and outliers and organize it in a structured format with columns for Date, Product ID/Name, Quantity, Revenue, etc.
Prediko automatically retrieves all your historical sales and inventory data from Shopify, eliminating the need for tedious data collection.
Once you have the data, analyze it to detect patterns that impact demand.
Use visualized formats like graphs or heat maps to spot patterns easily.
Now that you understand your data, pick the most suitable forecasting method based on your business needs.
Consider using a combination of methods to improve accuracy.
With the chosen method, create your first version of the demand forecast for the desired period (e.g., next month, next quarter, next year). Short-term forecasts (e.g., monthly or quarterly) are useful for inventory management, while long-term forecasts (e.g., annual or multi-year) are useful for strategic planning.
Generate a baseline forecast using only historical sales data to evaluate the impact of external adjustments. Use inventory management and forecasting apps like Prediko to automate this lengthy and time-consuming forecasting step.
A forecast isn’t set in stone, it needs adjustments based on the real world.
Include external factors like economic conditions, competitor actions, supply chain blockers, and new product launches. Cross-check forecasts with inputs from different departments (sales, marketing, operations).
Adjust for unexpected shifts. If a major marketing campaign is coming up, adjust demand predictions accordingly. Continuously compare the forecast with actual data to optimize your efforts.
Prediko allows you to edit the AI-generated demand plans so that you don’t have to rely solely on AI, allowing for a more balanced and accurate forecast that aligns with real-world factors. The app also shows actual and planned data side by side, giving you a clearer view for better decision-making.
While the overall process of demand planning and forecasting remains the same, the nuances, such as data sources, influencing factors, etc vary by different industries.
In Fashion & Apparel, forecasting is heavily influenced by short product lifecycles, seasonal preferences, and unpredictable trends.
Apparel Shopify stores rely on rapid-response demand planning, real-time sales data, social media trends, and seasonal changes to predict demand for specific styles or colors, often adjusting production/procurement weekly or monthly.
For subscription-based businesses, forecasting isn’t just about initial sales but also retention rates, churn predictions, and customer lifetime value. Demand planning must factor in renewal patterns, customer engagement trends, and the impact of promotional campaigns, pricing adjustments, etc.
In the consumer packaged goods (CPG) industry, demand forecasting must balance high-volume production of stable-demand products, short shelf life, and fluctuating consumer demand.
Unlike fashion, CPG demand tends to be more stable but is highly sensitive to price changes, promotions, and competitor actions.
A lot of tools can help with Shopify demand planning and forecasting, ranging from simple spreadsheets to advanced solutions.
Below, we explore some of the most popular demand planning tools used by Shopify businesses, highlighting their features, strengths, and pricing.
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Excel and Google Sheets are popular spreadsheet tools that many Shopify businesses initially turn to for demand planning due to their accessibility, familiarity, and flexibility.
While not purpose-built for inventory or demand planning, these allow you to create custom templates and formulas to track sales, forecast demand, and manage inventory.
However, they come with major limitations, especially as you scale. Manual data entry, lack of real-time updates, and limited automation make them prone to errors and time-consuming for complex operations.
Key Features
Pricing
Usually free but it may depend on your Microsoft and Google Plan.
Prediko is an AI-powered demand planning and inventory management tool designed specifically for Shopify businesses.
It has an advanced in-built AI algorithm to forecast demand accurately, helping brands avoid stockouts and overstocking. Its seamless integration with Shopify makes it a favorite among D2C brands looking to automate and simplify inventory operations.
Key Features
Pricing
Flexible plans based on annual revenue, starting at just $119 per month for unlimited users, SKUs, POs
Stocky is an inventory management app developed by Shopify, designed for brick-and-mortar stores using Shopify POS Pro, though it’s also useful for e-commerce merchants.
It uses Shopify sales data to provide demand forecasting and purchase order suggestions, making it a practical choice for businesses already invested in the Shopify ecosystem.
Key Features
Pricing
Free with Shopify POS Pro subscription
Katana is a cloud-based inventory management system, especially for small- to medium-sized manufacturers who are selling on Shopify. Businesses that need to balance manufacturing and demand planning can benefit from using Katana.
Key Features
Pricing
Starts at $179/month for the Starter plan (up to 1 inventory location)
NetSuite, acquired by Oracle, is an enterprise resource planning (ERP) solution that includes advanced demand planning features.
While not Shopify-specific, it integrates with Shopify via third-party connectors and is used by larger Shopify businesses needing a comprehensive system for inventory, supply chain, and financial management.
Key Features:
Pricing
Custom pricing based on business size and needs.
Demand planning isn't always a smooth ride. It comes with certain challenges along the way which include
Your forecast is only as good as your data.
If sales records are full of errors, missing transactions, or unaccounted returns, your demand planning will be way off. For instance, relying on outdated supplier lead times can lead to either too much stock collecting dust or empty shelves when demand spikes.
Most Shopify businesses use multiple tools, like ERPs, 3PLs, POS systems, accounting tools, and spreadsheets to track and manage inventory and sales.
The problem? None of them communicate with each other, leading to gaps in forecasting.
Let’s say your Shopify sales are spiking, but your Amazon inventory is sitting untouched. Without a centralized and real-time view, you might end up overstocking in one channel while running out in another.
Forecasting for new products is difficult. There’s no past sales data to rely on, so how do you predict demand?
A sneaker brand launching a limited-edition drop, for example, has to guess demand based on pre-orders, average category sales, influencer hype, and competitor trends.
A wrong estimate can lead to underproduction, causing lost sales, or overproduction, tying up capital in unsold inventory.
Forecasting isn’t just a supply chain thing, it involves marketing, sales, finance, and operations.
But if these teams operate in silos and across different tools, important details get missed.
For example, if the marketing team plans a huge Valentine's campaign without telling the demand planners, Sales skyrocket, but there’s not enough stock to fulfill orders. Or worse, the finance team doesn’t have the budget to support increased production, leading to cash flow issues and missed opportunities.
Consumer trends shift overnight. A viral reel can send demand for a product through the roof, while economic downturns or competitor discounts can tank sales.
Remember how demand for fitness equipment increased overnight during COVID-19, while formalwear gathered dust?
Shopify businesses relying only on historical data can’t react fast enough. Without real-time data and flexible demand forecasting models, you often end up playing catch-up.
Apply the following best practices as you do demand planning and forecasting for your Shopify e-commerce business
If you offer pre-orders, it’s important to incorporate the pre-order volume into your forecast as this gives you a direct signal of customer interest and demand for a specific product or SKU.
By factoring in them, you can better allocate inventory, adjust production schedules, and reduce stockouts or overstocks.
With Prediko, you can easily sync with ShipHero’s WMS and create POs based on your preorders.
Stanley cups are a perfect example of how social media influences consumer trends.
Social media isn’t just for marketing; it works great for demand forecasting as well. You can track sentiment, trending topics, and customer conversations to anticipate demand surges (or potential flops).
If people are raving about a product or a trend today, chances are they'll be buying it tomorrow and your forecast should reflect that hype.
Sure, AI is powerful, but the real magic happens when you combine it with human judgment.
The best forecasts blend AI insights with real-world and human experience because numbers don’t always tell the whole story.
Use AI to spot patterns and make data-backed decisions, while relying on your instincts and experience to refine forecasts and continuously train the algorithm.
Not all customers behave the same way.
Some are loyal repeat buyers, others are price-sensitive deal hunters, and then there are trend-driven shoppers who only show up when something’s hot.
By segmenting demand, you can forecast more accurately and fine-tune inventory levels for different customer types. This ensures the right products are available in the right quantities for the right audiences at the right time.
Forecasting isn’t always perfect. Surprises happen. A new competitor, a sudden trend shift, or a supply chain hiccup can throw everything off.
Having a financial cushion i.e. a forecast adjustment fund can help you. Set aside some budget, like 5-15% of monthly revenue or inventory value to handle unexpected demand spikes or emergency restocking.
Think of it as an insurance policy against demand volatility that protects your cash flow when things don’t go exactly as planned.
Even the best forecasts won’t materialize if your suppliers can’t keep up. Diversify your supplier base so you’re not overly reliant on just one source.
This way, you can scale up or down quickly when demand shifts, negotiate flexible contracts, and get faster turnaround times. Because the last thing you want is to be stuck waiting on stock while your competitors are cashing in. Plus, if one supplier drops the ball, you will have backups ready.
Want to dive deeper? Watch this Limited Supply webinar where Youri, Prediko’s co-founder breaks down how you can build resilient supplier networks to avoid stockouts and stay ahead of the competition.
Prediko has become the trusted choice for 500+ Shopify merchants. It delivers real value to growing e-commerce businesses by offering
Prediko's AI-powered forecasting has proven to work well for merchants across different industries for its precision.
Its AI algorithm is trained on over 25 million SKUs across 15+ industries to handle complex scenarios, from seasonal spikes to product variations without any manual analysis.
Prediko has a clean, user-friendly interface that turns complex supply chain management into an intuitive process, making it accessible even for businesses transitioning from spreadsheets.
This allows teams to quickly adopt and start benefiting from its features without extensive training.
Prediko offers an end-to-end solution that goes far beyond basic forecasting.
It helps Shopify merchants handle the entire supply chain from purchase orders and supplier management to raw material tracking and Bill of Materials (BOM) planning.
The app provides a thorough onboarding process and its support team is highly responsive to customer queries, ensuring a smooth adoption.
Prediko also offers flexible configuration options for lead times, manufacturing times, and days of cover, making it suitable for businesses of all sizes and complexities.
What truly sets Prediko apart is its commitment to evolving based on the users’ needs.
The team actively listens to merchants, rolling out new features and upgrades every few weeks to tackle real inventory challenges. This way, Prediko continues to meet the changing needs of growing Shopify businesses.
See all of this in action and experience the Prediko difference by starting a free 14-day trial today.