25 Feb Stock Replenishment in 2022 (Definition, Process, Best Practices)
Whether losing sales to out-of-stocks, or facing overstocking costs and markdowns, inefficient stock replenishment has a huge impact on a retailer’s GMROI.
Meeting sales demand has always been challenging, effective replenishment should mitigate issues that arise from poor planning and allocation.
Modern consumer expectations of inventory availability and fast order fulfillment mean that it is even more important for retailers to have a good stock replenishment process in place.
Before we get into the strategies and the best practices of stock replenishment, let’s define its key facets.
What is replenishment?
Stock replenishment is the process of ordering and allocating inventory to replace missing products on store shelves.
Replenishing stock is a key facet of inventory management which helps to balance inventory levels during a selling period.
What is replenishment stock?
Replenishment stock simply refers to the inventory that is ordered after a selling period has already begun.
What is replenishment effectuating?
Once a selling period is underway consumer demand begins to affect the inventory levels across the business: In one location there may be an unexpected spike in demand for red sunglasses which quickly sell out, meanwhile in another location those same glasses lay stagnant on the shelf.
Replenishment seeks to ensure that the right product is on the shelves at the right time for the consumers to maximize sales & minimize costs.
What is replenishment time?
Replenishment time is the time between initially placing a replenishment order, and the replenishment stock hitting the shelf.
The longer the replenishment time, the higher the cost. In order to shorten replenishment time, the best medicine, as is often the case, is prevention.
Of course, this is easier said than done. There are multiple factors and variables to account for and stay ahead of. Common factors include:
- Manufacturing time
- Packaging and shipping time
- Lead time
- Processing time at the warehouse
- Customer order fulfillment
No matter the size of the retailer stock replenishment has a real impact on GMROI. For retail businesses that have multiple sales channels and locations, having robust replenishment systems that can handle the complexity and demand of replenishment stock becomes very important.
So, how are retailers managing stock replenishment today?
Common strategies for inventory replenishment process
The inventory replenishment process is the strategy a retailer uses to identify which products to replenish, order & pick inventory from storage, and transport the product to location for sale.
Let’s take a look at the pros and cons of the 4 most commonly used strategies:
1. Periodic Strategy
Inventory levels are assessed and replenished at set intervals of time (E.g. bi-weekly, monthly, or quarterly). Retailers manually measure inventory levels and the cost of goods sold (COGS) to determine what needs to be replenished.
2. Reorder Point Strategy (a.k.a. min/max inventory replenishment)
An automated approach triggered by inventory levels. Retailers set stock and replenishment parameters that indicate when stock needs to be reordered.
A maximum stock level is set to limit overstocks, as well as determine the amount of inventory to be ordered. Once a set minimum stock level is reached, the replenish system is triggered and an automated order is placed.
3. Top-off Strategy (a.k.a lean-time replenishment & Just-in-time replenishment)
Stock is topped off during downtime or slow periods of selling to minimize the chance of stock-outs when demand spikes. This strategy is especially useful for retailers with high-demand SKUs that have short picking windows.
4. Demand Strategy
Demand forecasting is used to proactively identify where inventory will need to be replenished and in what quantities in order to meet sales demand.
Unified replenishment solutions account for inventory across all channels and locations enabling inventory rebalancing and allocation.
Which strategy is right for you?
The right process must serve your specific business needs. However, there are best practices that a good replenishment strategy should be able to implement.
Best practices for replenishing inventory
Every retailer has unique goals, needs, limitations, and challenges when it comes to replenishing inventory. It can be difficult to standardize something that has so much intrinsic variability.
To manage the volatility of inventory levels, your replenishment process should follow these 5 best practices:
1. Determine accurate lead times
Lead-time refers to how quickly the order can be fulfilled by the supplier.
This practice helps businesses understand the right frequency of replenishing to prevent shortages.
This is extremely important, especially for those retailers using last minute replenishment strategies like Top-Off or Reorder Point Strategy.
2. Replenish inventory from within the business
Inter-store transferring of replenishment inventory can be a game changer when balancing inventory levels.
You may have high demand in store-A and no demand in store-B; by replenishing store-A with product from store-B you free up shelving, meet sales demand, and do so while saving time and money.
Effective inter-store balancing is achieved by having a unified inventory platform, enabling visibility into inventory across all sales channels and location.
3. ABC analysis (a.k.a Contribution codes)
Identify and rank SKUs in your inventory mix to reflect their sales contribution. Once an ABC analysis has been performed, the retailer can optimize their assortment mix breadth and depth.
This analysis can be relatively straightforward for a smaller retailer, but becomes exponentially difficult as the business grows. Omni-channel retailers rely on analytics-powered inventory management solutions to compute the 100s of thousands of SKUs and millions of data points required for an ABC analysis.
4. Monitor & measure vendors’ performance
Similar to analyzing product performance, retailers should be keeping track of vendor performance for optimal vendor management.
There should be clear and tangible KPIs put in place that can be quantified and monitored, such as total missing or broken inventory/order shipped, lead-times and late delivery, instances of unavailable stock, and so on.
A time-frame should be set for assessing vendor performance, and real deliverables are then compared to the set KPIs.
5. Inventory Management Software
A smaller retailer can get away with managing their inventory manually on spreadsheets. They might use the Periodic Strategy to manage replenishment.
However, with each additional channel, location, and even SKU, the complexity of inventory management grows exponentially.
Some omnichannel retailers attempt to manage the size of their business using a ‘divide and conquer’ approach. Siloed channel operations limit visibility. Leaving retailers less agile and less able to make timely adjustments.
Others have chosen a unified approach to inventory management. Unifying software enables retailers to quickly identify and adjust for replenishment needs and opportunities. What’s more, they can take advantage of inter-store replenishment and inventory balancing.
Next steps: creating a replenishment system
Stock replenishment is daunting, yet is extremely important and can make or break a retail business.
Having an effective stock replenishment system will create a unified picture of both stock and replenishment, help automate replenishment processes with greater accuracy, and increase profits while minimizing costs for the retail business.