5 Critical Steps to a Profitable Replenishment Plan (2021)

5 Critical Steps to a Profitable Replenishment Plan (2021)

An effective replenishment plan will drive profit.

replenishment planning on a computer

There is an age old saying, and it goes like this: “you don’t plan to fail, you fail to plan.”

And what can be easier than planning replenishment?

All you need to do is plan to replenish the products that you sell out of. Right?

In reality, replenishment planning is a fairly complicated process that has to account for many variables, including logistics routes, timelines, availability, and cost. After all, what good is replenishing inventory if it doesn’t arrive on time, is the wrong quantity, or too expensive to make a profit off of?

So it is no surprise that retailers are scouring the internet to find how to plan replenishment for their business. 

Before we share some best practices that will surely boost your margins, let’s make sure we’re on the same page. What is replenishment actually, and what makes it so complicated?

What is replenishment planning?

Simply put, replenishment is the process of re-ordering in-demand inventory that is low or out-of-stock. The purpose of replenishment is to ensure that a retailer has the right quantity of product, at the right location, at the right time to maximize sales and minimize costs.

Replenishment planning is the process of figuring out how to profitably replenish inventory throughout the season, at what quantities, through which vendors / shippers, and how frequently — with the goal of minimizing out-of-stocks, unnecessary markdowns, and overall costs.

Why is replenishment planning so complicated?

Smaller B&M retailers with one or two locations may find replenishment planning fairly simple. If you have an accurate, up-to-date count of your inventory and sales, it’s possible to plan your entire replenishment process in Excel. You simply need to estimate how long your existing inventory is going to last you, and plan to replenish before you sell out completely. And because small retailers typically don’t have complex supply chains, shipments and prices can be planned in advance (with bulk discounts, fewer shipments, etc.).

Unfortunately, it’s not that easy for medium and large retailers.

Every additional channel and location multiplies the complexity of your replenishment process. Instead of trying to predict demand for one store and a limited number of SKUs, you have to do predict for each store and channel separately. Every channel and location has its own considerations that will impact your replenishment, including:

  • Demographics
  • Consumer preferences
  • Local competitors
  • Product seasonality
  • Distance to distribution center
  • Shipping time
  • Shipping cost

Because of this complexity, it’s nearly impossible to calculate optimal replenishment manually.

Instead, many retailers have turned to an algorithmic, rule-based approach. For example, they’ll re-order inventory to warehouses when it falls below some preset safety-stock number, and send it to stores on an as-needed basis. While this is better than trying to make all the calculations manually, this process has a lot of shortcomings.

For one, retailers often make the mistake of replenishing too much end-of-season inventory — creating unnecessary markdowns in the future. Conversely, retailers commonly make the mistake of being too cautious with order quantities on popular SKUs, replenishing too frequently and eating into their margins with shipping costs.

That’s why a good replenishment plan isn’t just about re-ordering inventory. A good replenishment plan should:

  • Minimize out-of-stocks by bringing inventory in just as it’s needed
  • Reduce unnecessary markdowns by only replenishing with inventory that is likely to sell
  • Cut shipping costs by consolidating orders when possible, and shortening logistics routes
  • Minimize store transfer costs by making sure that each store has its own profitable replenishment plan

It’s a tall order, to be sure. But there are 5 actionable steps you can start taking today to work towards these goals.

replenishment planning decreases out-of-stocks

Step 1: Have a clear picture of the whole business.

Oftentimes, retail businesses are segmented into distinct operational categories — where senior business leaders are responsible only for their own category (such as allocation, assortment, replenishment, and vendor relations) — and nothing else. This quickly results in a communication breakdown, as one category plan may fail to take all other category plans into account.

When the right hand doesn’t know what the left hand is doing. there is sure to be a breakdown in a retailer’s replenishment systems.

To address this, bring your category heads together to lay out all the vital factors in your company that influence your replenishment process — mapping out all existing policies and processes. Then, to truly fix this issue, you’ll need to work together to develop a unified process that takes the entire product life cycle into account — from when an order is placed with a vendor, to when it becomes available for sale to the customer.

Step 2: Create a list of product-specific distribution considerations.

It is important to account for demand when planning for your replenishment stock.

However, as mentioned above, demand is only one factor that needs to be taken into consideration. You also need to have a clear understanding of your product’s specific distribution journey.

Will your product be replenished directly from vendor to store? Or, will it go from vendor to distribution center, warehouse, crossdocks? 

Furthermore, you need to understand the demand at each of these locations. Some of these locations may fulfill customer orders directly while others only serve different stores. Understand also, that demand varies between store type and store location; each store may have its own plan-o-gram minimums and capacity limitations. 

replenishment planning meeting

Step 3: Understand the product-specific distribution process.

Some people refer to replenishment as S&OP – sales and operational planning. This is because stock replenishment is inextricably dependent on a vast number of factors throughout the product life cycle. Therefore, when approaching replenishment in a unified and holistic approach, you must have a detailed understanding of every part of distribution (as well as all the channels the product may be sold through). 

Some areas to evaluate in distribution include: 

  • Manufacturing time
  • Packaging and shipping time
  • Lead time
  • Processing time at the warehouse
  • Customer order fulfillment
  • Allocations of new order
  • Promotions

These factors along with other activities which take place in a retail organization, and affect capacities and operations must be considered as part of replenishment. 

Step 4: Leverage AI and advanced analytics whenever possible.

The scope of the problem can quickly become overwhelming and seem unmanageable.

How can a retailer with thousands of products, dozens of locations, and so many important factors to consider possibly calculate their replenishment optimally (or even effectively)?

The current reality is that most retailers attempt to tackle replenishment manually.

To do so they are forced to look at products at category level and overlook a number of key factors. This process is rife with error and is impractical causing lost sales, over-stocks, and too much money spent on distribution.

What leading retailers have figured out is that they must automate as much as possible.

Today’s advanced analytics and AI technology have become mature enough to take on the heavy lifting of replenishment.

For example, advanced analytics built for replenishment is able to create a unified predictive analysis of every factor mentioned above, while looking at a retailer’s products at a granular level. This means that replenishment is optimized at a SKU / store level, maximizing GMROI and leaving satisfied customers who are able to get the products they came to your store for.

Today’s tech allows for the ability to understand how reliable the inputs are that companies are using. For instance accounting for how often a vendor brings the product in on time, or identifying a way to consolidate shipments to expedite delivery and make it cheaper. By automating the large, granular, and mundane tasks you’re not only saving money by avoiding human error, but you can free up employees to focus on strategy and exceptions. 

Step 5: Be prepared to handle risks

Once your system is optimized for the majority of predictable product behavior, it is the time to focus on optimizing the final 20%. There are risks that can be accounted for because they are known, such as the fact that factories will be closed during certain holidays and will halt production. Such events can easily be accounted for and replenishing inventory can be scheduled around these expected risks.   

However some risks cannot be accounted for such as unexpected weather activities. 

A good replenishment plan must also include a contingency plan. Some questions to consider when developing a contingency plan include: 

  • Can you bring inventory from a different Facility or vendor?
  • Can you buy safety stock and allocate it quickly?
  • Can your inventory be reallocated from a different location?
managing risk in replenishment planning

Lets Review Replenishment Planning Best Practices:

Step 1  – lay out all the factors that influence your replenishment process. 

Step 2 – Develop a unified infrastructure that accounts for all factors ]influencing your process. 

Step 3 – Have a clear understanding of your distribution avenues.

Step 4 – Let advanced analytics solutions do the heavy lifting and optimize your process.

Step 5 – Develop a contingency plan that accounts for the factors mapped out above.

Bonus step – Grow your retail business.

A computer doesn’t do what you want it to do, it does what you tell it to do.

Therefore, the important part is to clearly understand and lay out the whole process. Once you have a clear understanding of what you want to accomplishment with your replenishment plan, you will be able to create clear instructions for the software and automate the process through the use of advanced analytics and AI technology.

Allow Retalon’s Replenishment solution to do the heavy lifting thus freeing up employees to focus on important strategic decisions and areas of exceptions.

Run a proof of concept to see how Retalon’s Replenishment Solution can boost ROI in your business. Contact our team to get a personalized demonstration of the solution.

Learn more about retail optimization