Demand Forecasting in Inflationary Markets

As we enter 2023, inflation remains a concern for most consumers. Although the inflation rate has decreased over the past few months, grocery prices are expected to increase. We can expect that consumers will prioritize discretionary spending after rent, utilities, food and gas.

For our small business community, this will present both a supply chain and consumer spending challenge.  How can a business project its income and balance sheet and what is the impact on day-to-day operations?  Profits will fluctuate in an uncertain market with rising prices. The past year certainly challenged most businesses and 2023 will present more to focus on core processes including the supply chain and consumer preferences. 

Understanding consumer trends is always important; in 2023, it will be critical. We like to think that customer loyalty matters, yet we know that consumers enjoy the convenience of online shopping. In your business, list three to five reasons you believe make customers loyal. Then, spend time validating your responses, focus on the top two answers, and build your marketing/sales strategy around those responses. When your loyal customers enter your business, find ways to show your appreciation – if you don’t, another business will.

In most businesses, the focus is on sales with the thought that more sales leads to increased profit. This can be true but it also can be a strategy for failure. Sales is only one line on the I

income statement and it is followed by all operating and expense accounts. What gets lost on the profit side is the amount of inventory purchased to insure a unit of sales. Inventory is a balance sheet category and every dollar of reduced inventory is a dollar of profit.

Spend your time understanding each unit of sales on a daily basis and determine the days of supply on hand to support the daily sales. Controlling inventory on low volume daily sales is not difficult and you may have minimum purchase amounts from the supplier. 

For higher volume sales units, the strategy of most businesses is “Just in Case inventory” while it should be “Just in Time.” You don’t need sophisticated software to “manage inventory” — it can all be done on a spreadsheet using daily sales, lead time from order to delivery and minimum order quantity. For slow moving items, the minimum order quantity may result in high inventory although it will have little impact on profit. 

Try this strategy on one or two items and see how it works in your business.