Inventory management systems track sales data, monitor stock levels and make smarter replenishment recommendations. This allows businesses to proactively replenish stores with best-selling items, without overstocking slow moving items.
The formula to calculate how much inventory is needed for replenishing is straightforward and it is: Total amount of inventory required for a specified period of time less amount of inventory available equals how much is needed for replenishment.
This is the only simple part of the replenishment process as before and after this step occurs, there are decisions to be made such as what parameters to use to run the calculation and how much is available to spend.
Replenishment Parameters
Replenishment parameters are the guardrails used to determine which location needs inventory and how much is required. Used correctly, stores will be appropriately stocked and the retailer will benefit from increased stock turn, sell through and cash flow, as well as an improved GMROI. The parameters to take into account can be categorised as either static, changed infrequently or flexible which can be changed each time a replenishment is run.
Static Parameters
Lead time: This is the length of time it takes to get from warehouse to store. It is sometimes referred to as transit time. This parameter is static for the simple reason that it takes the same amount of time from where the supplier/warehouse is located to get to stores. Note however that just because a delivery has arrived at the store does not mean that the stock is on hand in the sense that it is on show.
Replenishment frequency: This refers to the length of time between replenishment runs. The longer the replenishment frequency, the more stock a store will receive. Each store’s replenishment frequency can be different, for instance stores located in areas with low customer traffic may get replenished every two weeks, whereas stores with very high customer traffic may get replenished twice a week, or even daily.
Minimum and maximum quantities: Setting minimum and/or maximum quantities by location and SKU is another static parameter. These are generally set seasonally rather than each time a replenishment is run. Its purpose is to prevent overstocking stores, while ensuring there is a credible amount of inventory available on display based on rate of sale.
Flexible Parameters
Rate of Sale: Average number of units sold during a specified period of time. The only restriction to calculating the rate of sale is how much history is available to provide a meaningful average.
Replenishment period: Number of weeks replenishment calculation is to cover expected sales. This is also known as weeks of cover and is a lever often used to rebalance inventory levels across stores and to keep how much is spent in check.
Products and locations: Not all products or locations need to be replenished each time. Selecting a subset of products and locations to replenish may be required for a variety of reasons, for example if there is insufficient inventory or funds to replenish all locations.
How Much to Spend?
Top Down
Determining how much to spend on replenishment can be at a top line level, where there is a pre-determined figure the total replenishment must not exceed. This figure is generally known before the replenishment calculation starts.
One advantage of top down replenishment is that costs can be more easily kept in line with budgets and current performance, thereby reducing the risk of overspending. A disadvantage is that the items and locations being replenished may not be ones that will increase sell through or stock turn.
Bottom Up
A bottom-up replenishment method looks at what is needed to satisfy demand in all locations for each SKU. The amount to spend isn’t known until after the replenishment has been run and added up across all SKU/ locations combinations.
An advantage for bottom-up replenishment is that stock is replenished everywhere it is needed based on current performance, thereby reducing out of stock situations. A disadvantage is that when added up, the total value from items and locations being replenished may exceed the amount available to spend, leading to a budget/forecast overspend. This is more likely to happen if overall sales performance is below expectations.
Which is Better?
With a goal of having the right inventory in stores for customers, the best way to achieve this is without a doubt the bottom-up approach. However, given that this method can sometimes lead to spending more money than is available, it is usually best to use a combination of both approaches.
A bottom-up calculation can be done to see what the overall spend would be and then compare it with how much is available to spend. If the replenishment needs to be trimmed, it can be done by setting replenishment parameters in a way that doesn’t put stock turn and sell through at risk.
Final Thoughts
The ultimate goal of replenishment is to send stock to locations that stand the highest chance of selling each item as quickly as possible. This is because cycling through inventory as quickly as possible and not having excess slow moving inventory frees up capital and improves cash flow.
Other than this, having the right stock available in stores when needed, contributes to customers having a positive shopping experience (as opposed to alienating customers if there is insufficient stock in stores). This is easier to achieve by having a replenishment system that has flexibility in setting parameters, allowing replenishment specialists to optimise inventory levels at the SKU/location level.
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