The flow of content:
|What is stock replenishment? Why is it important?|
|Methods of stock replenishment|
|– Reorder point Method|
|– Periodic method|
|– Top-off method|
|– Demand method|
|Best practices for stock replenishment|
Ever wondered how your nearby store never quite runs out of stock for necessary items?
Well, it is because he is restocking the items well before it goes out of stock.
But how does he do it? How did he know when to restock the items and in how much quantity? Are there any formulas to calculate the stock replenishment?
Yes, there are set rules for stock replenishment aka inventory replenishment and this article gives you a detailed insight into everything you ever need to know about Stock Replenishment – what is its standard definition, how to calculate the replenishment point, relevant strategies of restocking etc.
What is Stock Replenishment? Why is it important?
Stock replenishment is the most important activity in any business as it deals with restocking the items for sale.
Margaret Rouse defines replenishment as,
“Replenishment is the movement of inventory from upstream — or reserve — product storage locations to downstream — or primary – storage, picking and shipment locations. The purpose of replenishment is to keep inventory flowing through the supply chain by maintaining efficient order and line item fill rates.”
In layman’s terms, stock replenishment is a general practice to make sure that the right quantity of the products are available at the right time with the vendor or shopkeeper on the picking shelves.
Did you know that as per a study conducted by Harvard Business Review,
“72% of stock-outs were due to faulty in-store ordering and replenishing practices—retailers ordering too little or too late, generating inaccurate demand forecasts, or otherwise mismanaging inventory”
Such alarming percentage indicates that inventory replenishment must be conducted in timely fashion as well as in a systematic way.
“A properly done Stock replenishment helps in eliminating stock-outs and overstocking – both of which can prove to be very costly in Supply Chain Management.”
Inventory replenishment has a wider scope and includes ready-to-sell inventory as well as raw materials stock for manufacturing the finished products.
“Restocking the items/products allows a businessman to run the business smoothly.”
Methods of Stock Replenishment
1. Reorder Point Method
What is the reorder point ?
“A replenishment/reorder point is the unit quantity on hand that triggers the purchase of a predetermined amount of replenishment inventory.”
Reorder point hence becomes an indicator for the store keeper to restock the items that are finishing up in the store. It is similar to the fuel reserve indicator that you have in your motor car or bike so that you can refuel it before you run out of fuel while driving.
Once reorder point is hit, the shopkeeper places a new order for the items refillment so that he can fulfill his future orders successfully without any halt.
“The end result being no interruption in production and fulfillment activities, while minimizing the total quantity of inventory on hand.”
However, one important aspect to keep in mind is that each item/product in the store can have a different reorder point as the reorder point is calculated on the basis of the time taken for your supplier to deliver the products to you.
2. Periodic Stock Replenishment Method
In periodic stock replenishment method the inventory levels of the products are reviewed at a set time period. Depending on specific inventory needs, a replenishment order can be placed or not, but only at the review point.
This method is ideal for restocking the items in a warehouse. Since Warehouse has a larger storage capacity, it can store items that can last for 3 to 6 months. Hence, periodic check/review is sufficient for the items stocked in the warehouse and the inventory levels of these items are looked at to see if they need to be restocked. In case, the inventory levels are good enough then there is no need to reorder the stock.
However, the down side of this method is that in case, if the inventory levels of one of the items is about to get exhausted, the vendor or the supplier might not know of it since he will count the inventory only at the stipulated time period. Also, some manufacturers or vendors do not reorder the items even if they are out of stock until the counting cycle ends since the restocking orders are placed only after the predetermined intervals.
3. Top off Method
Top off is one of the popular replenishing methods, it is a.k.a or lean time replenishment method. In this method, the stock is replenished when the picking operations are less active therefore, it is easier to review the stock and replenish it as per a predetermined threshold.
This is the most convenient method for retailers because it is the most efficient way to restock the fast moving SKUs.
Since the stock count is done then and there during less active operations hours, the replenishment can be done on daily or alternate days or weekly basis as per the requirement.
This method improves efficiency during peak periods as well since the items are always refilled in the forward pick locations during the slow demand periods.
4. On-Demand Replenishment Method
Another popular method of replenishment used by retailers is the On- Demand method. The vendor or shopkeeper basically restocks the items that are in high demand. Which means that other products might not be given a priority since they are slow moving items.
Now don’t get me wrong even wholesalers might be using this method but mostly small retailers practice this often.
Though this method might sound simple it is not as easy as it sounds! It requires careful pre-planning and forecasting the demand of the products in the near future so that you can stock it in appropriate numbers.
This method is ideal for seasonal products since there is high demand for a seasonal item only during a particular time of the year.
Sometimes, the demand for a particular item can skyrocket so much during the peak season that you definitely need to have a safety stock. For instance, the demand for Christmas trees is quite high during the Christmas times or demand for Pumpkins during Halloween. Safety stock enables you to adapt to the market fluctuations easily and keep a good balance between supply and demand.
Best practices for stock replenishment
Image credit: orderhive.com
There are a few things that you should consider doing regularly so that the required inventory/stock is available whenever you need it on the shelves. Here are few of those best practices for inventory/stock replenishment to keep in mind.
Regular stock counting
Stocktaking or stock counting is one of the most common practices that all retailers, vendors and manufacturers do on a regular basis.
Stocktaking at specific intervals helps in avoiding stock-outs, over stocking, stock theft, and stock shrinkages. Also, it will enable you to get the total number of each product(s) you possess on-hand, hence, it helps you in accurate tracking of inventory.
If any of the products are less in quantity then you will get a clear idea to go ahead and reorder them so that your business is not disrupted. Stock counting not only helps in identifying which items are getting sold the most but also let’s you predict which commodities are in demand based on their higher sales.
There are various ways in which you can do stock counting such as cycle counting, periodic stocktaking, spot checks, Barcode scanning etc. You can pick a method that suits your business the best.
This also brings us to our next important inventory control practice.
The current and the past sales data is resourceful since it gives you an idea on which products are selling like hot pancakes and which products are low-selling. This knowledge of sales helps you in restocking the items as per their demands.
You can also forecast the demand on the basis of consumer behaviour. For example, during Christmas times the demand for Christmas trees and ornaments rises to its peak. So it is a good idea to restock these items in adequate quantity in the months before Christmas time. However, stocking the same amount of Christmas trees and ornaments in Summer would be wastage of your money and storage space.
Therefore, the key is to restock the items according to the demand forecasted by both your previous sales data and consumer demand.
Having the stock of items supplied to you in quantity you need and the right time when you need it is essential for your business therefore, buy the products from a supplier who is dependable.
However, while selecting a supplier you must also choose the one that provides a quality product consistently at the right time in the right quantities.
It is a good practice to have more than one supplier in case if you’re dealing in essential commodities. Since they’re in high demand and you can’t risk going out of stock due to supplier’s delay in delivering the goods.
Now, we already learned about different methods to restock the inventory and its importance but how many times do you restock your items in a year? Knowing this is essential as it determines the success of your business and helps in planning your resources and finances for the coming year.
So, how exactly can you count the turnover of your inventory in a year?
It’s simple, you can do it by calculating your inventory turnover ratio.
Inventory or stock replenishment is the most ignored part of the supply chain but nonetheless is an essential part and requires a lot of focus if you wish to succeed in your business.
Hope this article has helped you in understanding the importance of doing restock in an orderly fashion. Let us know your thoughts in the comments. We’d love to hear from you.