Replenishment Planning: What It Is and How It Works

by Vector | Mar 13, 2020 11:53:00 AM

Replenishment-PlanningFellow inventory managers: This post is for you! Your worst nightmare is probably running out of stock and compromising your customers' loyalty and satisfaction, right? There's no more need for that. Replenishment planning is your solution, and this post will show you how.

Well, first things first: Let's talk about what replenishment is.

What Is Replenishment?

When you run out of stock, you need to replenish or restock it. You may run out of stock in two distinct scenarios:

  • When selling directly or shipping to the buyer
  • When manufacturing products

In the same vein, you may need to replenish:

  • The stock of your final products—those you sell or ship
  • Raw materials to manufacture your final products

Some actions—experts call these replenishment triggers—cause replenishment. For instance, when one of your furniture factory workers picks up the fourth-to-last bucket of white paint, you know it's time to reorder that color. Or when your inventory manager reports that you have only 10 pallets of Christmas lights, and it's late November. In other words, some actions trigger replenishment orders in a supply chain.

Similarly, here are some other ways to generate replenishment:

Either way, replenishment translates to:

  • The acquisition of raw materials
  • The manufacture of final products
  • Or the relocation of either raw materials or final products to the appropriate stock location

If you're a fleet manager of a shipper's or carrier's fleet, you might work with rolling inventory. That means your trucks leave the trailers in warehouses' parking lots with stock stored inside them. Afterward, when a distributor, a wholesaler, or a retailer needs that stock, a truck picks up the trailer and transports the stock.

So, how do you prepare replenishments?

Replenishment Planning Explained

First of all, a replenishment must happen only when there's a good reason for it. The mission of replenishment planning is to minimize stock and maximize service level. And a high service level means that a seller never lacks product to sell right away to their customers.

You may conclude that replenishment is part of a business' strategy to improve operational efficiency. And you're absolutely right! Also, from a business perspective, replenishment is essential. Buyers want ordered products at their disposal, and they prefer to buy from whoever can supply them the fastest.

Replenishment has two dimensions—planning and execution. What's the difference?

Planning looks into the future and tries to make decisions in order to anticipate demand or consumption. And those can be of either raw materials or final products. As a result of planning, you have a replenishment plan, and you can place purchase requisitions. But that plan lacks execution.

Replenishment execution is actually replenishing the inventory, which means:

  • Converting purchase requisitions into purchase orders
  • Sending those purchase orders to suppliers
  • Creating the corresponding accounting entries

In short, replenishment planning consists of performing mathematical calculations to decide how much and when to replenish inventory. But I bet you prefer an automated way of doing things, don't you?

Automated Replenishment Planning—Why Not?

An inventory replenishment system consists of software that implements inventory restocking methods. And those methods are ways of calculating replenishment needs while considering variables, such as the service level and stock demand or stock consumption.

Let's go into the "How?" of replenishment systems.

When companies use ERPs, WMSs, or IMSs, replenishment triggers originate from planning runs. And those planning runs are automated procedures that take demand or consumption as input and generate replenishment recommendations. The demand is based on forecasts (projected, unconfirmed final product demand) and current sales orders (confirmed final product demand).

On the other hand, consumption is based on the monitoring of stock locations. Therefore, raw materials or final products that fall below a preset level in the stock location trigger a replenishment order.

Replenishment planning is a balance between three things:

  • The stock level required to satisfy demand or consumption
  • The stock level necessary to avoid building up excess or obsolete items
  • Your suppliers' lead times and your lead times as supplier, if you are one

It's no easy task! You must, at all costs, try to fill your customer orders quickly. Spreadsheets are restrictive and may get too complex to use and manage. In that case, your profit margins may justify an investment in an inventory replenishment system.

Next, this post will take you through demand forecasts, which are input for the creation of replenishment plans.

A Deeper Look Into Demand Forecasting

The projection of final product demand can be based on:

  • Previous sales
  • Customer demand historic data
  • The stock keeping unit (SKU) position in the product lifecycle
  • Seasonality
  • Trends
  • Sales promotion periods
  • Competitors' activity

However, the demand for an SKU can change daily. For example, the demand for bikinis can be higher during spring or summer. And the demand for turkey is higher a few days before Thanksgiving and practically zero the day after. This means you must update your demand forecasts regularly. And software can help you a lot in that department!

Now that you know what replenishment is, how should you plan it and automate it? It's time for some tips and tricks!

Some Hints on How to Plan Replenishments

Replenishment planning is about satisfying your service levels and always having the right stock available to help you achieve high levels of customer loyalty and satisfaction. But how can you do all that?

Hint #1: Keep the Risk of Variable Supplier Lead Times Low

Reduce the risk of variable supplier lead times by:

  • Including an adequate amount of safety stock when calculating your replenishment needs. You can do that with the most important stock items—in other words, the ones most valuable to your business. Or you may focus on the faster-moving items. Or you can even do it for suppliers who have longer lead times.
  • Considering known lead time delays in your replenishment needs' calculation. Examples of lead time delays are summer holidays or a holiday during which businesses shut down. For instance, some businesses close during the week between Christmas and New Year's Day. The best solution is sending your supply order early enough to your supplier, asking them to fulfill it before your supplies run too low.

Hint #2: Set Realistic Service Levels

If your products have high and regular demand, then definitely this guideline applies to you. And you must set very high service levels—90% or above. That is to say that your stock must satisfy 90% of the orders for high-demand and regular-demand products.

Keeping high volumes of all SKUs is risky. You don't want to pay for more storage space than you need, and some items may expire or go out of fashion. Therefore, the smartest strategy is to:

  • Stock more and set high service levels for SKUs that consistently sell well and are cheap
  • Avoid stocking and set lower service levels for SKUs that are expensive and have volatile demand

Let's talk a little more about supply items that decrease in popularity.

Hint #3: Avoid Stock Obsolescence

An excess of stock with little demand causes, over time, obsolete stock. And to sell obsolete stock, prices have to be extremely low, which compromises your profitability. To avoid stock obsolescence, follow these steps:

  • Identify the stock that has demand, excess stock (little demand and more stock than demand), and obsolete stock (stock without demand).
  • Then, take actions, such as reducing the quantities of excess stock you reorder or implementing marketing campaigns to increase demand.

If you operate in multiple locations, you should be able to monitor the stock level of every SKU for each site. And, if necessary, you should redistribute SKUs across sites, from those with lower demand to those with higher demand.

Hint #4: Product Life Cycle Is Relevant

A product has different demand levels at each phase of the product life cycle. For example, during product growth, the demand trend is upward. During the end of maturity, demand is irregular because sales start to decrease. So, take the product life cycle into consideration when forecasting demand and replenishing.

Hint #5: Consider the Human Component in Demand Forecasts

Qualitative forecasting is great. But humans who know, from facts and observations, how the market and your supply chain partners work are precious! If someone informs you that a customer of yours is going to expand or is planning a huge marketing campaign, you must consider that information when forecasting demand.

Hint #6: Account for Errors

Calculate your demand forecasting error range based on historic data, forecasted demand, and actual demand.

Hint #7: Help Your Own Suppliers

Share your order forecasts with your suppliers so you can help them improve their service to you. With that sharing, your suppliers can better plan their production. Consequently, you can negotiate the best price for your orders to them and demand their best service to you.

Hint #8: Don't Forget Demand Forecasting Outliers

Flash sales, large one-time orders, employee strikes, the unexpected bankruptcy of a competitor, and natural disasters can all originate outliers in demand forecasting. Carefully analyze your demand forecasting data to detect outliers over time. Then, calculate the standard deviation of average demand. Finally, decide whether it's a trend or an actual outlier.

Hint #9: Beware of Demand Forecasting Accuracy

Let's face it: Your demand forecasts are unlikely to be 100% accurate. Therefore, it's very important that you calculate the error level in your previous forecasts. Afterward, you can consider that error level in future forecasts and adjust your replenishment planning accordingly. For instance, you can increase safety stock to cover periods of inconsistent demand.

For example, if you're the owner of a trucking company that only transports gas and demand for gas is expected to increase, you may need to buy or rent more trucks. That increase in demand can also require more fleet maintenance, so a fleet management solution might help you.

Depending on the industry you're in, you may need to analyze other factors in addition to demand forecasts.

Hint #10: Keep up to Date on Demand Forecasts

The longer you take between demand forecasting calculations, the less accurate your forecast will be. And the more erratic markets are and the more erratic the demand for a product is, the more frequent your forecast should be.

Final Hint: Additional Aspects That Matter to Replenishment

On a final note, not only service levels, demand forecasts, stock levels, and supplier lead times should count for smart purchasing decisions. Other aspects must also matter, such as:

  • The urgency of a customer order—in non-urgent customer orders, you may not need the shortest supplier's lead time
  • The importance of a customer order—it may justify buying stock from a local supplier at a higher price
  • The benefit of a supplier’s discount on bulk-buying—it may be less than losing warehouse space
  • The existence of enough safety stock—if you have enough safety stock, you may want to negotiate a lower price on orders to your suppliers at the expense of a longer supplier's lead time

Best of luck to you as you develop and perfect your replenishment plans!

This post was written by Sofia Azevedo. Sofia has most recently taught college-level courses in IT, ICT, information systems, and computer engineering. She is fond of software development methods and processes. She started her career at Philips Research Europe and Nokia Siemens Networks as a software engineer. Sofia has also been a product owner, working in the development of software for domains such as telecom, marketing, and logistics.

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