5 Best Practices for Optimal Inventory Replenishment

Inventory Replenishment September 19, 2022

Jin Hyun

Writer

Also known as stock reordering, the term inventory replenishment describes the process of purchasing then moving inventory (ready to sell products and raw materials) from reserve storage to primary storage, and eventually onto the selling locations.

When it comes to inventory control, having a clear process for the supply chain is vital for businesses to meet demand and maximize profit. Inventory replenishment is, therefore, a key part of optimal inventory planning.

The Importance of Inventory Replenishment

To avoid critical supply chain issues that result in high costs, such as under or over-ordering, having a clear inventory replenishment strategy is essential for businesses. However, this concept is much more complex than just a measure to prevent out-of-stock scenarios as it can also affect customer satisfaction, retention, and trust.

Underestimating demand, and therefore understocking popular products will result in customers turning to competitor brands. If your business cannot provide the products a consumer is seeking in a timely manner, they will inevitably find a company that can.

On the other hand, overstocking can also lead to business issues, such as excess storage costs, wastage from obsolete or spoiled goods, and labor costs associated with managing surplus inventory.

Key Factors to Consider

The most successful businesses, regardless of industry, will have a set inventory replenishment strategy. This strategy is typically made by an executive, manager, or supervisor, though the staff members will be involved in the process in one way or another.
The top three factors businesses should be aware of in replenishment planning are-

1. Fluctuating forecasts
The closest a business can get to predicting the future is making informed forecasts based on historical data. Forecasting leads to clarity on actions, however, issues will arise with market fluctuations based on economic issues, changes to customer demands, and supplier conditions, which can all affect the projections.

2. Space optimization
Inventory replenishment is also affected by the availability of warehouse or other storage space. Issues such as excess carrying cost and spoilage can arise when managers are unable to provide the appropriate space necessary for storing and moving inventory.

3. Existing stock level
If accurate, real-time information is not provided regarding the inventory levels within a company, this can lead to delays in replenishment and an interruption in the re-stocking plan. It's important to regularly track stock volumes using inventory management software that can integrate with both forecasting software and the company's POS system to provide real-time inventory information. By having an accurate grasp of existing stock information, businesses can accurately determine what they need more or less of.

5 Profit-Enhancing Best Practices

Effective inventory replenishment processes will be unique for different conditions, though there are general best practices that all businesses can adopt.
Consider the following tips for maximizing profits while managing inventory volumes.

1. ABC analysis
If the levels of inventory are not reported accurately, this puts the whole reordering and replenishment process in jeopardy. The ability to determine which products to prioritize will assist businesses in making sure they are stocking each item at their most optimal volume in a way that will also maximize profits.

There is a simple model available when assessing inventory prioritization and determining the right stocking levels for each item. This is called the ABC analysis model.
Items are categorized and ordered by-

A- Well-selling or high-profit margin items.
B- Mid-range valued items.
C- Low-profit margin items.

For example, A and B items could be prioritized for replenishment, whereas C items could be re-ordered based on current demand.

2. Determine accurate lead times
This is about knowing when to order inventory before an item becomes sold out. The lead time' refers to how quickly the order can be fulfilled by the supplier. Having an accurate picture of vendor lead times helps businesses understand the right frequency of replenishing to prevent product shortages. When businesses wait too long to reorder popular products without taking into consideration how long it will take to receive these items, there will inevitably be a period of stockout.

3. Utilize sales forecasting
Past performance is one of the best factors to consider when deciding on the minimum and maximum quantities to order. This is when sales forecasting comes in. By taking into consideration past data, consumer trends, and economic factors, businesses should predict the consumer demand they can expect to see in the future. This will also help them to realize how much inventory should be ordered to maximize profits while limiting losses.

4. Replenish from within the business
For businesses that have multiple warehouses or store locations, first, check whether it's possible to replenish and redistribute inventory from other locations before reordering. This frees up working capital and allows a business to fulfill service levels without adding excess inventory purchasing costs.

5. Inventory management software
Finally, in order to effectively take on these tips and create an intelligent replenishment plan, inventory management software is necessary to accurately track stock volumes.

These automated management systems can also integrate with POS systems to provide the most up to date information regarding product quantities as well as tracking tools to notify users when they reach their reorder point.

This will create a harmonious supply chain and allow the business to achieve service level targets, ultimately driving profits and enhancing customer satisfaction.