We're looking at replenishment strategies in logistics. We'll define the term, consider some examples, and offer a few strategies that might help you optimize the continual flow of goods and material for your operation. Replenishment is a hot topic. Especially now in the era of e-commerce and with hypercustomization in product demand.
The reality is that too much inventory is costly. Not enough inventory is also costly! In short, a good replenishment strategy just might make the difference between profit and loss.
Replenishment is one of those intuitive industry terms you hear being used a lot. And as long as you know the definition of the word, you can guess the basics of what it means to the logistics industry.
Thanks to decades of Gatorade marketing, the average consumer might think replenishment has something to do with quenching thirst. After all, one of Gatorade's mantras these days is "rehydrate, replenish, and refuel." That's not as catchy as "Be Like Mike." But at least it's informative about Gatorade's goals as a product.
And truth be told, the logistics realm thinks of replenishment in terms of hydration. Both dehydration and overhydration are serious issues for your immediate health. We must keep our electrolytes in balance. As such, regardless of your product, the same is true for inventory levels.
What Does Replenishment Mean in Terms of Logistics?
According to RPEsolutions.com, which focuses on retail, replenishment means “acquiring product on a recurring basis to support anticipated need.” In other words, we anticipate our future needs through forecasting and then order products accordingly.
Sounds easy enough, right?
But forecasting is a bit more difficult than it sounds. Forecasting is an art and a science. It increasingly uses data-based algorithms to predict future demand.
But the algorithms are only as good as your data. In many ways, your forecast is only as good as your data. We'll discuss data in more depth below.
Why Proper Inventory Levels Matter
As noted above, too much and not enough inventory are both costly positions to be in. Let's elaborate.
First, the problem with too much inventory involves carrying costs. According to investopedia.com, "Inventory carrying cost is the total of all expenses related to storing unsold goods. The total includes intangibles like depreciation and lost opportunity cost as well as warehousing costs."
In essence, each unsold piece of inventoried product (sometimes called overstock) contains a percentage of related costs such as overhead, warehousing, salaries, transportation, handling, taxes, insurance, and depreciation. In short, unsold inventory is burning a hole in your pocket. If it's a food product, the risk of spoilage can lead to total loss of inventory.
On the other hand, not enough inventory (also called out-of-stock) hits you in the pocketbook as well. Obviously, you're missing out on a sale! In the long term, that can hurt your future relationship with that customer—and, by proxy, their influence network.
Meanwhile, if your hit your supply chain with a hot order to please the customer, it can be costly in a different way. For example, hot orders come with expediting fees or worse. No supplier likes surprises. In addition, pressure-cooker situations can damage the relationship with your supplier, especially if you ring the alarm with any frequency.
So what replenish strategies can you use to avoid the pitfalls of overstock or out-of-stock?
There's Fun in the Forecast, With a 70% Chance of Historical Sales Data
As mentioned, strategies for hitting the bullseye on inventory all involve forecasting. In other words, to plan for the future, we must first look to the past. Forecasting starts with analyzing past sales. We can look at sales within blocks of time: day, week, month, quarter, year.
That historical data can uncover one or more trends. Certain products will have intuitive cycles. For example, holiday decorations are predictably cyclical. (Granted, Christmas seems to start earlier every year.) But based on this forecast data, a certain level of product will be manufactured.
Ah, but new products go to market all the time. What happens when you have no historical sales and nothing to replenish? Strategy in this case is a matter of using similar products currently on the market as scaffolding. Then you can ramp up production volumes and replenishment cycles accordingly.
That being said, not all of the product made will ship immediately to retail locations. Instead, some product will go to stores, and some will ship to warehouses and distributors. And herein lies the role of replenishment strategies.
Examples of Replenishment Strategies
Reorder point strategy: Once stock of an existing item trickles down to a set level (or reorder point), it'll trigger a reorder. Replenishment quantities are often related or based on the efficient use of raw material and/or transportation costs. For example, ideal order quantities (or multiples) may reflect an easy round number of raw material. Similarly, replenishment may align with the quantity required to fill one pallet shipped LTL (or one trailer shipped FTL). It depends on the product.
Lead time strategy: This replenishment strategy is similar to reorder point strategy. You still monitor stock levels. But taking it one step further, you also monitor purchase trends with your supplier's lead time in mind. This strategy correlates to a just-in-time manufacturing process. Essentially, the lead time strategy factors in the time it will take for replacement inventory to be produced and get shipped to point of use.
Now let's look at two more strategies: push and pull.
Push (just in case): This strategy relies on the forecast. Planners determine the replenishment levels. They look for the right number that will allow them to avoid unexpected out-of-stock scenarios. Because of this, the push strategy requires a decision every time someone places a reorder: how much do we replenish? Typically, push strategy builds in safety stock. But clearly the push strategy places a lot of pressure on the analysts and their forecast. Thus, that safety stock can turn into dead stock. And dead stock looks bad on a profit-and-loss sheet.
Pull (just in time): Pull strategies work somewhat in the opposite way to push strategy. Pull relies on real-time demand data. That data is based on actual demand numbers for the product in question. The result? Replenishment and production orders are more accurate. With the pull strategy, replenishment matches rate of use. Pull is a more granular replenishment strategy. In other words, pull leads to less overstock and less out-of-stock.
Tips to Optimize Your Organization's Replenishment Strategy
Let's look at a few options.
Digitization of Warehouse Management Systems (WMS)
How can you optimize your data? Modern warehouse management systems track products from dock to dock. A WMS knows your inventory levels of everything under the roof. In other words, a WMS facilitates an accurate pull replenishment strategy. The software doing the heavy lifting is the imaging and digitization apps like Vector's that the warehouse personnel use.
Digitization Software Creates Better Data
These software apps create the data. The data facilitates the pull strategy. But that's not the only thing they're good for. For example, Vector's software integrates with most major WMS systems. It's also cloud-based.
Vector's imaging tech allows for customization and automation of certain processes. These include automatic billing and invoicing. Imagine being able to invoice the instant a replenishment shipment delivers. In essence, digitization creates more than just data. It also helps with cash flow. That's a replenishment strategy you can get behind.
Operational Efficiency of eBOLs
The result of better data is a more efficient overall operation. One example of workflow efficiency is electronic bills of lading. eBOLs created by digitized documents result in the phenomenon of contactless freight. Contactless freight is safer, quicker, and paperless. But contactless also means paperless. Thus, the safety, quickness, and efficiency continue wherever you remove paper from the equation. Driver. Dock. Front office. Back office. Year end. Audit time. Everyone who touched that piece of paper just won back wasted time. In other words, the efficiency of the paperless office compounds over time.
In Summary: Rehydrate, Replenish, Refuel, and Reduce Inefficiencies, for ROI
Even if we remain properly hydrated, most of us will never fly like Mike. But with proper replenishment strategies, our businesses might.
How will we take flight? Through the power of digitization technology. Without all the paper in the office, we'll certainly feel lighter.
This post was written by Brian Deines. Brian believes that every day is a referendum on a brand’s relevance, and he’s excited to bring that kind of thinking to the world of modern manufacturing and logistics. He deploys a full-stack of business development, sales, and marketing tools built through years of work in the logistics, packaging, and tier-1 part supply industries serving a customer base comprised of Fortune 1000 OEMs.