Fellow 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.
When you run out of stock, you need to replenish or restock it. You may run out of stock in two distinct scenarios:
In the same vein, you may need to replenish:
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. If you're a fleet manager, you might need to buy or lease new vehicles because some of the trucks in your fleet have broken down or are in danger of breaking down.
Similarly, here are some other ways to generate replenishment:
Either way, replenishment translates to:
So, how do you prepare replenishments?
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:
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?
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 two things:
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.
The projection of final product demand can be based on:
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!
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?
Reduce the risk of variable supplier lead times by:
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:
Let's talk a little more about supply items that decrease in popularity.
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:
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.
A product has different demand levels at each phase of the product life cycle. For instance, 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.
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 take that information into consideration when forecasting demand.
Calculate your demand forecasting error range based on historic data, forecasted demand, and actual demand.
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.
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.
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 example, you can increase safety stock to cover periods of inconsistent demand.
Depending on the industry you're in, you may need to analyze other factors in addition to demand forecasts. For instance, if you're in the logistics business, you may need to conduct regular fleet audits to be sure you're delivering materials safely, efficiently, and at the lowest cost possible.
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 is the demand for a product, the more frequent your forecast should be.
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:
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.