Suppose a customer browses the racks at your store during her lunch break. She finds a dress she likes, and it's even available in her size. When she gets back to her desk, she’s still thinking about the dress, so she figures she’ll treat herself.
Next, she visits your online store, finds the item, and prepares to purchase it only to receive an “out of stock” notification. She’ll wonder, “How can this be?! I just saw eight on the rack 15 minutes ago!”
Frustrated, shethey clicks away and forgets about the dress. Your business has just lost an easy sale. Why? Because it’s being run on an inefficient inventory replenishment system.
What Is Inventory Replenishment?
What does replenishment mean? Inventory replenishment (also called stock replenishment) describes the process of getting new stock back to your pick area. Basically, you need to replace stock that you sold - replenish inventory. Keep in mind that your pick area encompasses more than a physical area in the warehouse -- it also includes a “virtual pick area,” so to speak.
What is Replenishment?
Consider the example of the woman trying to purchase a dress online - a dress she’d just seen in the store a few minutes earlier. Even though the item was technically available, it wasn’t in the virtual pick area where she could place an order.
Today, retailers are competing with inventory wizards like Amazon who have well-funded and well-oiled fulfillment operations. Losing easy sales like this one damages a retailer’s profitability over time.
Fortunately, these kinds of lost sales can be avoided with a bulletproof inventory replenishment strategy. To create an effective retail replenishment strategy, companies need to commit to the process, which includes:
- Gathering real-time inventory data
- Obtaining end-to-end visibility over your entire supply chain
- Collaborating with salespeople, inventory managers, long-term customers, and suppliers to create demand forecasts and replenish inventory
- Identifying the factors that could significantly impact your demand forecast and inventory replenishment strategy, including entry or departure of a competitor, seasonal demand, and issues with suppliers
- Creating a contingency plan for what you’ll do if your demand forecast fails
- Drafting stock replenishment rules
Obtaining Access to Real-Time Inventory Data
In 2020, retailers must focus on real-time inventory data within their businesses.
What’s the difference between real-time data and static inventory data?
Static data requires inventory managers to manually update inventory information. A manager would look at the numbers from the last inventory count and adjust that figure based on the sales volume over the previous period.
In today’s fast-moving, trillion-dollar e-commerce market, retailers that use static inventory data are at an obvious disadvantage. For one thing, they’re battling a time delay. For another, they don’t have the groundwork necessary for an omnichannel inventory management strategy, which puts them steps behind their competition.
With an omnichannel inventory management strategy, retailers can fulfill orders with inventory from anywhere in the business. For instance, in our earlier example, what likely happened is that the e-commerce site’s order fulfillment system was only tied to the inventory at a one warehouse.
The Leading Supply Chain Management Software for “New Age” B2C/B2B Fulfillment Businesses
As a result, the order management system didn’t know that there were eight dresses available at one of the store locations.
If the company had been using an omnichannel inventory strategy, its system could have checked the inventory numbers of all other warehouses - and even store locations - and the sale would have been won.
Retailers and warehouses interested in embracing an omnichannel inventory management strategy don’t need to upend their entire fulfillment infrastructure to accomplish it. They can implement cloud-based inventory management software to gain access to accurate inventory data from across their supply chain.
With real-time inventory management software, retailers have the data they need to develop a continuous replenishment program.
The Importance of End-to-End Visibility and Inventory & Stock Replenishment
Supply chain visibility refers to a business’s ability to understand what is happening and when it is happening, from the provision of raw materials all the way to the fulfillment of customer orders.
Of course, obtaining visibility over your supply chain is easier said than done since it requires the cooperation of all of your supply chain partners.
If you’re a mega-retailer, like Wal-Mart, you have the clout and the order volume to make certain demands from your upstream supply chain partners.
If you’re a smaller or medium-sized organization, it can be more difficult to get your partners to cooperate, either because they don’t want to or because they don’t have the resources to accommodate your requests.
That said, there are a few ways that retailers can make the case for supply chain cooperation.
Demonstrate How Supply Chain Cooperation and Communication Reduces The Bullwhip Effect
It occurs when supply chain partners receive a piece of information and either overreact or underreact in response.
Let’s say there’s a 7 percent increase in demand, but supply chain partners interpret it as a 30 percent increase in demand and ramp up production accordingly. This over-response leads to excess stock.
Conversely, if there’s a 7 percent decrease in demand, supply chain partners could interpret it as a 30% decrease in demand and slow down production. Their underreaction leads to shortages and stock outs. It can also lead to poor customer service if a supply chain partner no longer believes there’s an adequate amount of business.
The best way to think of the bullwhip effect is to imagine the movement of a bullwhip. The smallest flick of the handler’s wrist leads to large waves along the length of the whip.
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So, what causes the initial motion?
Sometimes it’s as simple as a supplier receiving an order that’s smaller than usual without much context. If the customer doesn’t provide an explanation (e.g., seasonal demand changes) then the supplier may assume there’s a demand problem and overreact.
In other cases, suppliers make assumptions based on market conditions or what they’re hearing from other suppliers.
What this shows is that supply chain partners can benefit from supply chain visibility. If they know that you, as the retailer or the warehouse, will provide a similar level of transparency throughout the process, it’s a win-win situation. They don’t have to guess and underreact or overreact to fluctuations in demand.
Install Automated Systems to Facilitate the Easy Transfer of Information
Another way to improve the likelihood of supply chain cooperation is to make the sharing of information as easy as possible. With the right systems, sharing information with suppliers (and receiving information in return) doesn’t have to be painful.
First, your warehouse or retail operation must eliminate manual processes and implement automated replenishment systems as possible. The best way to do this is through an enterprise system, like a WMS that’s tied into your inventory management system.
Then, your businesses can use information exchange systems, like electronic data interchange (EDI), to easily facilitate transactions with your suppliers.
You can see how important the effort to obtain supply chain visibility is in creating and maintaining your inventory replenishment strategy.
Collaborate With Stakeholders to Create the Best Stock Replenishment and Demand Forecasting Strategy
Demand forecasting and replenishment planning is one of the pillars of your inventory replenishment strategy. A demand forecast uses historical data to make an educated guess about how much business you’ll receive in the future.
An accurate demand forecast relies on good data so, if you’ve implemented a system that provides real-time inventory data, you’re off to a good start. If you’re using static inventory data, you need to make sure your data is cleaned up and up-to-date before using it for demand forecasting replenishment planning.
The first rule of demand forecasting and replenishment planning is to prioritize data. People who have worked in a business for a long time often rely on gut feelings to determine order quantities. They justify this by saying, “I’ve worked here for 20 years, so I know that…” While this institutional experience is extremely important (and puts numbers in context) it shouldn’t replace hard data.
The next rule of forecasting and stock replenishment is to bring in as many stakeholders as possible. At minimum, this should include your inventory managers, your sales team and even your suppliers and long-term customers, if you have an open and transparent working relationship.
Each of these stakeholders should bring their own forecasts based on the historical data they have, whether it’s the sales team, the purchasing department, or the manufacturing team. This collaboration is important because even if everyone within the business has access to the same data (which isn’t always the case), they will consider different factors based on their specialties.
To create accurate demand forecasts and do effective replenishment planning, companies typically need access to about 12 to 24 months of historical data.
Written by Ruthie Bowles
Ruthie is a content marketing consultant for Logiwa. Her specialties include small business development and inventory management.