4 Inventory Replenishment Tactics That Increase Profits
- Financial considerations of inventory replenishment
- Operational considerations of inventory replenishment
- Common inventory replenishment challenges
- 4 Inventory replenishment tactics to increase profits
- Inventory replenishment trends
- Enhance your inventory replenishment processes with EazyStock
Any business that carries inventory needs to avoid stockouts and back orders. Both can be very costly, resulting in short term sales losses but also long-term customer loyalty issues or even attrition. As stock leaves the warehouse, inventory replenishment processes need to ensure that items are reordered in the right quantities and at the right time to meet customer demand.
Conversely, businesses can’t afford to carry exorbitant amounts of extra stock, as the carrying costs erode profit margins.
This is essentially the arduous balance of maintaining optimised inventory levels.
In this blog, we’ll explore how improving inventory replenishment processes and practices can bring profit back into your supply chain.
Financial considerations of inventory replenishment
In many sectors where profit margins are narrow, inventory optimisation is a key part of the business. It’s therefore up to the financial leaders, responsible for ensuring a sound financial strategy, to liaise with their procurement team to ensure that there’s sufficient inventory to meet demand, without too much capital being tied up in stock. Most financial leaders lean heavily on their inventory management systems and accounting software to run inventory analysis and financial reports.
A key responsibility of the inventory buying team is to negotiate the best price so that products can be sold profitably. But it’s equally important to focus on the timing and quantities of the orders, to ensure distribution is not interrupted. Inventory replenishment must meet customer demand, and for this to be accurate, demand forecasting should be used to predict future sales and ensure that stock levels are sufficient. For businesses that operate with legacy software applications that lack demand forecasting functionality this can be very time consuming. Teams are left to manually calculate demand forecasts in Excel, which increases error margins and can be very costly.
Operational considerations of inventory replenishment
Operations teams are typically held to service delivery targets measured over specific periods of time, called service delivery rates or order fill rates.
A good service delivery rate is between 95-100% on all orders. This can usually only be accomplished when the business is spot on with its inventory replenishment and purchasing practices. While the operations team will be working to avoid excess inventory, it will also want to ensure the operations are running smooth, with no rushed orders and mistakes that could lead to complaints and increased costs.
The operations manager will also be looking to inventory turnover rates for stocked items to ensure that stock is being rotated to prevent inventory obsolescence.
Common inventory replenishment challenges
Many businesses operate to tight profit margins, so costs need to be kept minimal and organisational efficiency needs to be maximised to maintain profitability. However, certain variables can present challenges that will hurt profits and performance:
- Variability of supplier lead times: Vendor and supplier lead times can make or break a distributor’s profitability. Even reliable suppliers will have unforeseen and unpredictable disruptions in delivery. The interruptions in stock availability can negatively impact customer relations and loyalty over time. Adequate safety stock level management is the most effective means to sustaining vendor variability.
- Maintenance of safety stock: Customer demand is seldom completely predictable: Just In Time (JIT) supplier delivery can often be too risky, so a certain amount of emergency stock needs to be kept for your highest turnover items, to ensure customer demand is satisfied. ABC Analysis can help operations managers better understand which items are classified as high or low priority.
- Minimum/maximum order level quantities: Suppliers max / min order quantities can be an inefficient inventory purchasing practice. Whilst a minimum order quantity may take advantage of reduced carriage costs, it can also result in excess stock. Similarly, a maximum order quantity can result in excess carriage costs and increased lead times. Either way, you’re likely to either not be ordering enough stock to meet demand or ordering too much which can lead to obsolete inventory.
- Excess stock levels (over stock): Having too much stock impedes cash flow and negatively impacts profitability. And, if demand for those items falls off over time, managers are left with obsolete inventory that has to be written off the books as a loss to the business.
- Stockouts (back orders): Having insufficient stock can disappoint customers negatively impacting customer loyalty and attrition – great news for you competitors! Stockouts also interrupt cash flow, which can lead to costly backlogs.
- Stock obsolescence: Poor stock forecasting leads to an excess of stock with little or no demand. As time passes, the stock becomes obsolete and needs to be sold at heavily discounted prices or even written off as a bad investment in financial statements. This typically reduces the overall profitability of the business and can look very bad to executive management or stockholders.
4 Inventory replenishment tactics to increase profits
Now let’s look at 4 main components of driving more effective inventory replenishment practices to lower costs and increase profitability.
- Know when to order: It’s important to know the lead-times between the order being placed and the fulfillment of that order. You can then predict the reorder frequency and prevent excess inventory. Historical sales and inventory seasonality can be used to predict ordering points and ensure that old stock is sold before a new order is placed. However, a certain amount of safety stock will need to be kept to fulfill unexpected orders or to cover your stock balances in the event of an unforeseen supplier delay.
- Know exactly how much inventory to order: As some items will sell faster than others, past performance can be used as a gauge to order the correct amounts of stock. Historical sales forecasts are a strong indicator of how well a product will preform in the coming months. Seasonality is also a large factor in ensuring stock balances are being adequately maintained to meet customer demand.A common mistake is not accounting for the product life cycle of stock. Every inventory item will have a birth, growth rate, decline and end of life. Being able to track the product life cycle stages of your inventory results in more effective tracking of potential stockouts or excess stock situations.
- Monitor and measure vendor performance: Negotiate with suppliers on their willingness to be flexible with minimum and maximum order quantity requirements. In addition predictable vendor lead times can also reduce variability and overall costs in your supply chain. The ability to flexibly negotiate price on bulk orders is also a bonus.It’s ideal to have a system in place that analyses supplier performance metrics to ensure you have the right preferred vendor selected for every unique inventory replenishment order.
- Use multi-location inventory redistribution: In a multi-warehouse operation, some warehouses may have excess stock, while others may struggle to fill orders due to high item turnover ratios. Being able to redistribute stock between warehouses efficiently can keep stock at optimum levels whilst maintaining service levels. Redistribution practices also take some of the costs out of your supplier relationships. Using inventory already in your warehouses and on your books will result in the freeing up of cash flow while mitigating the risk of inventory obsolescence.
Inventory replenishment trends
Enterprise Resource Planning (ERP) systems help manage the day to day accounting for inventory while keeping a ledger of what inventory has come in and what has gone out to monitor company-wide resources. However, companies that are looking for a competitive edge require more than what traditional inventory management systems can offer.
Inventory optimisation SaaS solutions can help drive down costs in the supply chain, while ensuring customer satisfaction is kept high. To more effectively manage stock replenishment and purchasing practices, software such as EazyStock can help businesses monitor stock levels in real-time to maximise the efficiency of operations.
Inventory optimisation solutions extend multi-location planning and redistribution capabilities, enabling stock to be moved to where it is required, keeping service levels on target. This also ensures that stock is turned over regularly, freeing up working capital to be invested back into other areas of the business.
Obsolescence can be managed by monitoring historical sales data and demand patterns as items move through their product life cycles. Optimisation solutions can even send system alerts in real-time to mobile devices notifying you when something needs attention.
Enhance your inventory replenishment processes with EazyStock
If you’re in need of help optimising your inventory levels across your network of warehouses, then schedule a demo of EazyStock and discover how easy it is to optimise your inventory levels and costs.