Inventory replenishment involves purchasing and moving inventory, both finished goods and raw materials, from reserve storage to primary storage and eventually to the selling location.
The Importance of Inventory Replenishment
Having a clear inventory replenishment strategy is essential for organizations to avoid critical supply chain issues that result in high costs, such as having out-of-stock products, spoilage, or excessive stock. Underestimating demand, and consequently understocking popular products, results in stockouts. Depending on the product category, 21% to 43% of customers who encounter a stockout turn to a competitor brand.
On the other hand, overstocking leads to business issues, such as excess storage costs, waste from obsolete or spoiled goods, and labor costs associated with managing surplus inventory.
Factors to Consider
Regardless of industry, the most successful organizations have a clear inventory replenishment strategy capable of responding to changes in demand signals predicted from sales, demand, and operations data. The three key factors organizations should consider in replenishment planning are:
- Fluctuating Forecasts: Despite careful planning, unexpected market conditions and global events, such as the COVID-19 pandemic, introduce uncertainty into fixed forecasts. Having proper forecasting enables an organization to turn insight into action and mitigate these fluctuations.
- Space Optimization: Availability of warehouse storage space affects how often inventory can be replenished. Issues, such as excess carrying cost and spoilage, arise when planners cannot provide the appropriate space necessary for storing and moving inventory.
- Existing Stock Levels: If accurate data regarding inventory levels is not available within an organization, this can lead to delays in replenishment. By understanding current in-stock levels, organizations determine what they need and when they need it.
If the inventory levels are not reported accurately, the whole organization’s ordering and replenishment processes are in jeopardy. All products are not equal, and companies must prioritize product stocking to maximize profits.
ABC Classification is a simple model available when assessing inventory prioritization and determining each item’s stock levels. ABC classification is a ranking system that lets you identify and group items in order of importance to segment your inventory into different groups. For example:
- Extremely important items
- Moderately important items
- Relatively unimportant items
A and B items could be prioritized for replenishment, whereas C items could be re-ordered based on current demand.
Determine Accurate Lead Times
Lead time refers to how quickly the supplier can fulfill the order. Having an accurate picture of vendor lead times by SKU is critical to understanding the right frequency of replenishment and preventing product shortages. Optimizing lead times also saves shipping costs by reducing rush deliveries and allowing for bulk shipments.
Use Sales Forecasting
Predicting consumer demand is always a challenge. Leading organizations use probabilistic analytics that consider a wide range of factors, including past sales data, consumer trends, economic factors.
Vanguard Predictive Planning™ predicts product demand for improved production scheduling, inventory management, and financial planning. The software leverages the best-possible statistical forecast methods with real-time insight entered directly by sales teams, marketing staff, or anyone with specific knowledge not included in the historical data. The result is accurate forecasts that improve service levels, customer loyalty, and your bottom line.
Replenish from within the Organization
Before re-ordering products, supply planners should use workflows and other automation to ensure excess inventory is not available from another warehouse or store location. This process frees up working capital and allows an organization to fulfill service levels without adding extra inventory purchasing costs.
Inventory Optimization Software
Multi-echelon inventory optimization (MEIO) balances inventories across the entire supply chain network and is ideal for building intelligent replenishment plans.
Supply chain planning software that includes MEIO, such as Vanguard Predictive Planning™, reduces excess inventory levels through algorithmic optimization calculations and machine learning. This approach provides foresight into base inventory policies that are not emotion-based and subject to human error. Additionally, Vanguard enables supply planners to leverage “what-if” scenario planning to help them understand service and cost alternatives that put the right stock levels in place and release millions in working capital.
Inventory replenishment process details vary for every organization. For best outcomes, use a supply chain planning platform to align cross-department planners, set clear goals, and analyze scenarios to model paths to meet them.
For further research, download our case study and find out how Vanguard Predictive Planning™ helped Aurobindo Pharma increase monthly inventory utilization by 99%.