Replenishment Strategy: The Basics for Distributors
As you continue your journey to order-to-cash excellence, does thinking about Replenishment cause you headaches? Does your head spin thinking about what to order, how to order it, and when you should order it? Does all of this leave you confused and struggling to create a viable Replenishment policy?
Put simply, Replenishment is the process of moving items along your supply chain to ensure inventory levels are sufficient to cover your demand. Effective Replenishment requires keeping your fill rates up (meeting demand) while simultaneously driving down your inventory costs. In order to create a cost-effective Replenishment policy, you need to have a well-developed understanding of your inventory and your demand. Reducing your inventory without sacrificing customer satisfaction is a challenge, but we’re here to share some insights to make planning your inventory more manageable.
There are a few common roadblocks you’ll face when it comes to building out your replenishment strategy, including:
- Accurate demand forecasting
- Supplier lead times
- Safety stock management
- Reorder points and min/max levels
- Preventing stockouts and backorders
- Avoiding overstocking and obsolete inventory
We’ll focus this discussion around demand and inventory planning, but if you’re looking for help refining your safety stock and reorder points, give our previous restocking strategies post a read. In order to develop a successful Replenishment policy, let’s start by breaking down three important considerations in the management of your inventory.
In order to ensure that your demand forecast is as accurate as possible, include not just a single estimate but an average estimate as well. In addition, make sure you’re also measuring the variability of the inventory demand as well.
Keeping accurate estimates of your inventory costs will play an important factor in determining your Replenishment policy. These costs include not only your ordering and holding expenses but your cost of lost sales and customer goodwill too.
Maintaining dependable and accurate estimates of your delivery lead time (and variability) will allow you to plan your inventory effectively. If you manufacture or assemble items, include your processing time in the estimate.
Now that we’ve covered three of the key considerations for managing our inventory, we’ll use these details to help us draft our Inventory policy which will drive our Replenishment policy.
Getting the right products to the right customer at the right time is made possible by an accurate and dependable Inventory policy. A solid Inventory policy will help you answer the following questions:
- When do I review my inventory?
- When do I order?
- How much do I order?
We’ve outlined a few of the most common methodologies below for you to consider.
Not every inventory Replenishment method works for every business – or every product. A reorder point strategy may work better for a business with a lot of high-volume SKUs or SKUs with fluctuating demand. Businesses with more predictable demand may find that the periodic Replenishment the most effective. Some companies use a combination of different Replenishment methods for different product lines, or they may shift to a different method during peak demand.
Segment your Inventory
By using demand components (as well as value) to prioritize your Replenishment, you can ensure that you’ll have the right items in the right quantities to meet demand when and where it occurs. This will also help to prevent you from investing in riskier items which could lead to excess and obsolete inventory, causing you to lose money. One way to accomplish this is to segment your inventory by demand, using A,B,C,D Item Analysis.
- Items that comprise approximately 60% of your sales volume, items that sell well and are profitable
- Items that comprise approximately 20% of your sales volume, your mid-range value items
- Items that are slow sellers, comprising approximately 15% of your sales volume
- Items that are specialty items or items considered for discontinuation, these may be your least profitable items
This is a fairly simple way to segment your inventory. More advanced methods may take into account demand and volatility, pick frequency, value of annual usage, or profitability.
Another way to segment your inventory by value is to calculate your non-fill rate per item, multiplied by your cost or gross margin of the item. Next, rank the resulting list from highest to lowest and you will have identified your most problematic items — those that are costing you more money than they’re making. By addressing these items first you can begin to simplify and streamline your Replenishment process.
Admittedly, Replenishment and Inventory management are some of the most difficult challenges companies and Operations teams in particular face, because it’s difficult to accurately predict actual customer demand.
However, assessing your inventory’s past performance can yield great insights into the profitability of each item in your warehouse, helping you make well-informed purchasing decisions that are more cost-effective. While it can never be an exact science, your distribution business model isn’t complete without a Replenishment strategy — or the right inventory management tools. If you’re looking for more resources on organizing and optimizing your inventory, head over to our Replenishment-focused resources page, built to help you understand demand and how to design a Replenishment strategy to meet that demand.