There is a saying in the sales business, the more empty your warehouses look, the better your sales team is. And if your warehouses look overstocked, your sales team is not doing its job.
But in the real world, the situation is not that simple. Sales team need to strike a balance between having an adequate amount of stocks in the warehouse that don’t stock out and also do not end up in over stock situations. These measures need a lot of planning, forecasting and more importantly knowledge about the market trends and making the correct purchase decisions for products in demand.
Let’s discuss more on inventory replenishment and common mistakes done by businesses while ordering their stocks.
What is Inventory Replenishment?
Dictionaries define replenishment as “filling again by supplying what has been used up.” In other words, Inventory replenishment refers to the process of inventory movement from reserve warehouses to primary storage, then onto picking locations. Stock replenishment can often be used for both ready to use commodities and raw materials delivered by suppliers as well.
How inventory replenishment works?
Depending on the type of business, a team of specialists is assigned the work to oversee inventory requirement for the firm. Usually, these teams consist of the warehouse managers and/or specialised planners who focus on ensuring that the company has required amount of stock to produce goods and/or fulfill customer orders.
These team majorly work on different segments of inventory management for understanding the inventory requirement for the production cycle, forecasting the demand of the products based on market trends and other metrics which will help in stock measurement and maintaining a balanced stock flow in the warehouses.
Demand forecasting plays a vital role in understanding the reorder requirement of each and every product, based on its production lifecycle and customer demand in the market. Once the requirement seems to be apt for reordering, the concerned department is contacted for the replenishment of a certain amount of product.
Factors that impact Stock Replenishment
Even the most efficient replenishment strategies often fail due to some of the external factors which are listed below:
- Company’s forecast has fluctuated
Forecasting needs to be done for both the amount of raw material needed for the production cycle and also the no. of products that will be sold as per the current market demand. In both the cases, the external factors like suppliers lead time during raw material delivery and other casual reasons plays an important role in stock replenishment for the warehouses. In most of the cases, a small change in customer demand or one of the suppliers failing to deliver, can impact a lot in warehouses stock management and cost huge losses for the organisation.
- Warehouse space is not optimized
In most of the warehouse management issues, outdated or overstock products block the new product delivery to be stocked up in the inventory. Hence, mismanaged warehouse space is one of the major reasons for stock replenishment issues.
- Poor end-to-end visibility
End-to-end visibility in today’s world is very important to maintain on time delivery status with the customers. In most of the big manufacturing companies, suppliers are unaware of the final delivery cycle which creates raw material delivery mismatches and delay in lead time from the suppliers.
Common pitfalls in inventory replenishment
Now when we understand the external factors affecting the inventory replenishment, lets understand some of the organisational pitfalls which cause huge losses due to mismanaged inventory replenishment.
1. Lead-Time Forecasting
Many companies face the issue of incorrect lead time forecasting from the suppliers where they give a fix timelines for raw material or product delivery, but end up either sending the items too soon or too late from the expected time. These improper timelines have a huge detrimental impact on your inventory levels and fill-rates. In most of the cases, inventory replenishment delay in raw material causes detained end product production and delivery, due to which companies have to incur huge losses due to delayed and returned goods.
One more important factor to identify inventory replenishment is the product’s seasonal tendency. Usually, seasonality is a simple concept, and shouldn’t be a critical factor while dealing with inventory storage but typically, our customers see about 20% of their products with a seasonal profile effect.
In most of the cases, inventory demand suffer instability due to seasonal and other natural weather changes.
3. Order Cycle Analysis
How often do you order from a supplier is as important as how much you order. There is a cost associated with every order. Suppliers often take shipping, transportation and labour charges which depends on the amount of stock ordered by the firm. Ordering too often can end up costing repetitive expenditures in the long run. Balanced bulk ordering is the best way to save money on transportation costs. There are numerous formulas and softwares in the market which give some guidance on how to order a balance amount of products. Whereas, the best answer to such inventory cost effective scenarios, is to have a well thought out plan and stick to it.
4. Time cycle Analysis
Many a time, we always emphasize on the amount of stock needed for fulfilling customer demands and don’t notice the amount of time it takes to finish those stocks from the shelves. Many fast moving products often finish earlier irrespective to the amount of inventory ordered which cause repetitive recorders for the organisation. These reorder and out of stock scenarios cause a huge loss for the organisations and can be tackled with proper demand forecasting considering both time and amount of stock needed for most demanded products.
Read More – 5 Ways to Boost Your Inventory Management Systems.
Thing to consider during balanced Inventory replenishment
- When Should I Order New Stock?
Reorder Point = (average demand during the lead time)(lead time) + (safety stock)
Balanced stock replenishment come with good and timely planning. If we review our stock on a continuous or periodic cycle, we will have a better understanding on the exact requirements of our inventory for the production cycle.
Once we closely monitor our inventory, we can easily understand the threshold of the amount of inventory reaching towards the reorder point and once reached, we can safely reorder our required stock amount.
Along with When to order, we should have a clear understanding what to order as well. Every product has its time and demand lifecycle. Depending on the demand of the product we should consider the time in which the ordered amount will get over and based on which the corresponding inventory replenishment needs to be done.
- How much should I order?
How much to order at each reorder point is very critical in differentiating between excess and out of stock situations. There are two methods to determine the correct amount of order to replenish.
The first is called Fixed Order Quantity, in which we order the same amount of inventory every time you place an order. When we order a fixed quantity, there is a risk of lead time which can delay the production cycle or end up into out of stock situation. However, bulk order and consistent product delivery cycle has its own advantages with a regular understanding between the vendor and the supplier.
The second method is called Order Up-To Level. With this method, you need to only order enough products to bring your inventory levels up to your designated target level. In this method, the order amount may vary every time you reorder your stocks. Although there is less of a chance of a stock out, but we need to keep a certain amount of safety stocks to avoid any delay in product delivery. Also, many companies lose out on the bulk discounts and other offers due to these partial stock ups.
Read More – 4 Reasons for Carrying Safety Stock Inventory
Take Away on avoiding inventory replenishment mistakes
We as business owners, should understand that neither review process or order quantity can be 100% accurate for everyone, every time. Business requirements can vary depending on many factors including desired service level, demand, supply, and supply lead-time and many other factors.
Hence, when we are deciding on an inventory review policy, the ABC method of inventory management should be applied, which works best for each business model. ABC methodology of inventory tracking involves giving specific importance to products based on their value to the company. I.e A.B.C. (Always Better Control) method of inventory management.
Under this method, every material is classified into three categories in accordance with their respective values.
- Group ‘A’ consist of the most costly items which are around 10 to 20% of the total items, but may account for 50% of the total value of the stocks in the warehouses.
- Group ‘B’ consists of products which constitutes around 20 to 30% of the total items and contribute about 30% of the total value of the stocks.
- The last category constitutes the 70 to 80% of the products is covered costing about 20% of the total inventory value. A regular maintenance is required for these items.
This selective value approach results in a considerable reduction in the storage expenses and provide cost dependant service for each product.
We should understand that deciding on the ideal stock replenishment method is highly dependant on the type of business model we have and also the product life cycle involved. But at the end of any inventory reorders we should make sure that we don’t over stock or understock our product requirements.