Avoid Making Costly Inventory Replenishment Mistakes

3 min read

Tags: Blog, Demand forecasting, Inventory management, Purchasing & replenishment

Daniel Fritsch   September 10 2015


Inventory Replenishment Mistakes

Index

  1. It’s Tough Being a Supply Chain Planner in Today’s Market
  2. 3 Key Components of Inventory Replenishment
  3. Mitigate Risk By Leveraging Optimization Software
  4. Enhance Your Inventory Replenishment

“Sorry, we are out of that item.” How often have you heard that during a shopping trip? Even popular e-commerce websites are littered with inventory out of stock notices on top selling items. When stock balances hit zero, a company has essentially failed to manage their inventory replenishment correctly. They have not replenished their inventory in time to avoid shortages and backorders. The reason behind the problem could be poor demand forecasting, lack of inventory control of stocked items, and errors in systems or manual methods controlling when and how much to order what products.

While having out-of-stock items means that some shelves and warehouse racks are empty, the irony is that there are billions of dollars wasted each year in excess stock. And most struggle to find an optimized balance between the two costly challenges.

It is not just retail stores that need to worry about properly managing inventory levels and costs. In fact, inventory management processes are found everywhere in the business world. Maintaining inventories is necessary for any company dealing with physical products, including manufacturers, wholesalers, suppliers, distributors and retailers. In US alone the manufacturing and trade inventory on-hand was estimated at $1.812 trillion in June 2015. With that much inventory on-hand, it begs the question, how much of that inventory is excess stock or even obsolete stock?

It’s Tough Being a Supply Chain Planner in Today’s Market

Many wholesalers, manufacturers, retailers and eCommercers rely on their enterprise resource planning (ERP) system to help them decide when to replenish, procure or purchase their inventory of products and how much of each product to reorder. They are relying on the system to alleviate customer service problems and improve profitability.

Unfortunately often inventory planners and even buyers do not understand what the actual definition and purpose of each of the application’s parameters. As a result, the system is often setup incorrectly or is missing critical functionality required for an optimized inventory mix and accurate replenishment parameters.

3 Key Components of Inventory Replenishment

When the shelf or warehouse rack is empty, it is usually too late to place a new order. In inventory management, a company must pay special attention to three things:

  1. Know precisely what to reorder
  2. Know when to reorder items
  3. Know exactly how much to reorder

The what, when and how of inventory replenishment is vital to keeping costs contained and inventory levels under control. The key is to find the optimal time when an item must be reordered and at the necessary quantity to ensure a continuous balance of inventory to meet demand while ensuring inventory isn’t piling up in stock locations. The goal is to minimize total warehousing and order costs while carrying just enough to prevent a shortage of inventory.

ABC Analysis Diagram

 

Many companies will use an ABC Analysis model to classify inventory items according to their customer demand and inventory turnover ratios to ensure they are tracking what items need to be order, when they should be order and how much should be placed for that order. ABC Classification, as represented in the diagram below, can also help inventory managers more efficiency layout their warehousing facilities to speed up order fill rate times and lower labor costs associated with order fulfillment.

Mitigate Risk By Leveraging Optimization Software

Inventory optimization software can be used to extract data from ERP tools or inventory management systems to support accurate demand forecasting and replenishment models to keep costs contained. Most inventory management systems today lack this critical functionality, which can lead to inflated carrying costs of inventory that eats away at a businesses profit margins.

Enhance Your Inventory Replenishment

All in all make sure that every single one of your employees that influence the supply chain and are responsible for replenishing products understand these 3 primary concepts. By paying close attention to these 3 initiatives, the business will be able to maximize productivity to achieve the goal of creating a more effective and profitable inventory management process. To get more information about what inventory replenishment challenges exist and how to solve them read the white paper dealing with this topic:




Overcome 3 Common Inventory Replenishment Challenges