In the intricate interplay of supply and demand, a retail business’s success hinges on inventory replenishment. Effective replenishment strategies ensure that shelves remain stocked and customers stay satisfied. Since consumer preferences can change suddenly, the art of inventory replenishment requires finesse and foresight—you have to have enough stock on hand to meet surges in demand without tying up too much of your capital and incurring unnecessary warehousing costs.
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What is inventory replenishment?
Inventory replenishment is the process of maintaining a business’s stock levels. The goal is to ensure that you have enough inventory on hand to meet customer demand and avoid both stockouts (running out of a product) and overstocking (accumulating more inventory than you sell). Inventory replenishment involves tracking and analyzing sales trends and supplier capabilities to determine how often you should restock. Effective inventory replenishment strategies help you maintain an efficient supply chain, minimize costs, and meet customer demand on time.
Benefits of a proper inventory replenishment process
Effective inventory replenishment helps you fulfill orders promptly without overstocking. The benefits of proper inventory replenishment include:
- Cost savings. Overstocking is costly—your money is tied up in inventory when it could be used elsewhere, and you have to spend more on warehousing. Proper replenishment also minimizes the likelihood of having to sell inventory at a discount or write it off (an accounting process that lowers a product’s value to zero), both of which decrease profits.
- Steady profits. A stockout, when an item is unavailable to customers, results in lost sales. Proper inventory replenishment analyzes sales data to ensure the right products are on hand to meet current and future demand, helping you maintain a consistent revenue stream.
- Customer satisfaction. Timely order fulfillment can increase customer satisfaction. Low stock levels and stockouts can lead to frustrated customers who may take their business elsewhere.
- Lower shipping costs. Optimizing your inventory replenishment strategy will help you control shipping costs. By correctly predicting demand and replenishing inventory accordingly, you can avoid higher expedited shipping costs to make up for unexpected stockouts. You will pay for standard shipping if you replenish on time, allowing product to arrive before or as it is needed.
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4 inventory replenishment methods
There are four primary approaches to inventory replenishment:
1. Top-off method
The top-off method involves replenishing inventory to capacity in stores and fulfillment centers—the warehouses from which products are shipped to consumers—during periods of slow sales. By restocking during low demand periods, such as off-shifts at night, you avoid getting in the way of customers (in a store) or the workers who pick items to ship to consumers (in a fulfillment center) during peak times. If your products are high-demand and you have a high inventory turnover ratio, the top-off method may make sense.
2. Periodic method
The periodic method involves reviewing inventory levels at set intervals and then deciding which items need to be replenished. This method works well for retailers with large warehouses and predictable demand. The downside is that if demand increases unexpectedly, you may not know a product is running low in time to replenish before a stockout.
3. Reorder point method
With the reorder point method, replenishment is triggered when the quantity of a product dips below a specified threshold—the reorder point. Setting a reorder point minimizes stockout risk by ensuring that your safety stock—the extra inventory you keep on hand to prevent stockouts—never gets too low. Reorder points differ by product and should be based on a supplier’s lead time, forecasts of future customer demand, and your target quantity of safety stock.
4. On-demand method
This method bases inventory replenishment on anticipated customer demand. With this approach, you only order enough inventory to meet projected demand and maintain a safety stock. With accurate demand forecasting, this inventory replenishment method can be particularly efficient and cost-effective.
Best practices for inventory replenishment
You can use these best practices to execute a seamless inventory replenishment strategy and to avoid lost sales.
- Perform accurate inventory counts. You need accurate information about your current stock levels to replenish effectively. A combination of physical inventory counts and automated inventory management creates a solid foundation for a replenishment strategy, and it can also help you identify loss from theft. Use a system of stock keeping units (SKUs)—unique codes assigned to individual products—to accurately track your inventory.
- Accommodate your suppliers. Your replenishment process will rely upon suppliers whose busy seasons might coincide with yours. If your supplier has long lead times, consider keeping a larger safety stock on hand to meet unexpected increases in demand. Another strategy is to use more than one supplier for high-demand products to reduce the impact of longer lead times.
- Forecast demand. By forecasting customer demand, you’ll be less likely to get caught off-guard by an increase in demand, and you won’t have to dip into your safety stock as often. Use sales reports and historical data to get the most accurate predictions when demand planning.
- Use automation. Manually managing thousands of pieces of stock is challenging. Inventory management software can automate most inventory management processes. Stocky, an inventory management app from Shopify, allows you to forecast demand, set reorder points, and submit purchase orders to suppliers.
Inventory replenishment FAQ
How can businesses accurately forecast demand for inventory replenishment?
The simplest method of forecasting involves calculating the average daily orders in a past time period and multiplying that average by the number of days in a comparable future time period. Take seasonality into account—average daily orders in the summer months may be different than average daily orders around the holidays. Inventory management software such as Stocky can also help you forecast increases and decreases in demand.
How often should inventory be replenished?
A business should replenish a product once it has reached its reorder point threshold, an indicator that stock is about to fall below the desired level. An effective system automatically triggers a reorder at this time.
What role do lead times play in inventory replenishment?
Lead times affect how long it takes a supplier to receive an order and then prepare and ship the products. A longer lead time can be offset by placing a larger order at an earlier date.
How can technology assist with inventory replenishment?
Inventory management systems can automatically track SKUs as they move from storage to a selling location. They can automate an inventory replenishment system and provide accurate data, such as the number of available products in storage. Inventory management systems are also capable of monitoring individual orders through the picking, packaging, and shipping processes.