Forecasting

Inventory Replenishment: Methods and Policies to Increase Your Inventory’s Productivity

Inventory replenishment is key to smooth and efficient business operations. This is achieved by maintaining the optimal amount of available inventory. Knowing exactly when to order inventory is the art of replenishment and takes time to learn. 

Let’s focus on the best methods and policies to improve your inventory’s productivity. Optimizing your inventory works to enhance your company’s processes and operations. 

What is inventory replenishment?

Let’s begin by kicking off with an inventory replenishment definition. Inventory replenishment is the process of ordering stock from suppliers in time to meet customer demand and avoid stock shortages without stockpiling surplus inventory. 

Inventory replenishment solutions also refer to the process of moving inventory from reserve storage in multiple warehouses to primary locations. Customized inventory replenishment solutions facilitate easy warehouse transfers to move products from one warehouse to another to replenish required stock. 

Not only is inventory replenishment planning a crucial aspect of supply chain management, but it’s also a crucial aspect of business logistics. This is because, when fulfilled correctly, your cash flow is optimized. There will be no lost revenue because of stockouts and not much cash will be tied up in excessive inventory. 

The inventory management replenishment process maintains peak stock levels. And it ensures that your products are ready to ship and meet customer demand as quickly as possible. 

Importance of choosing the right inventory replenishment models

It’s essential that you choose the right inventory replenishment models to meet your business’s needs and consistently order economic order quantity (EOQ). Your choice will depend on your purchasing process, business model, product lines, suppliers, order fulfillment methods and other factors. 

The right inventory replenishment model ensures that your warehouse never runs out of stock. It also ensures that your warehouse doesn’t store excess inventory that costs your business money. In addition, effectively managing your inventory reduces operational costs. This is because it maximizes warehouse space and decreases product misplacement issues. 

If your business chooses the wrong inventory replenishment model, you run the risk of stockouts. Stockouts cause huge problems in terms of retention rates and lead to poor customer experiences and poor customer loyalty. So it’s crucial to implement the right system to manage your inventory properly. 

In a nutshell, an efficient inventory replenishment process ensures you always reorder the right quantity of the right products at the right time to avoid any stockouts or excessive inventory. 

Let’s take a look at four different inventory replenishment models for a little more clarification. 

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4 inventory replenishment methods

As well as using an effective replenishment system, effective inventory replenishment techniques involve: 

  • Accurate demand forecasting
  • Optimizing inventory levels 
  • Placing purchase orders at the right time to receive goods in time
  • Tracking and reporting KPIs 

The four inventory replenishment strategies are as follows:

Demand method

This inventory replenishment technique means that stock is reordered based on forecasted demand. This means that the demand method requires ordering enough stock to meet consumer demand expectations. Some businesses only reorder enough stock to fulfill current custom orders, but they ensure that they maintain enough stock to avoid potential stockouts. 

An automated inventory replenishment demand process uses inventory replenishment data to determine current and historical sales for accurate stock replenishment orders. 

Top-off method

The top-off inventory replenishment method is typically used in businesses with fast-moving stock. Picking shelves occurs during business downtime periods. This ensures that popular products are always available to fulfill customer orders during peak times. 

Bringing inventory forward into primary storage “tops off” primary inventory levels. This reduces the chances of running out of fast-selling stock items. This strategy works well for businesses with high-demand SKUs with limited picking opportunities. 

In practice, the top-off method is vulnerable to supply chain disruption. It’s also dependent on vendor efficiency and timelines. 

The best practice for the top-off inventory replenishment method is to determine accurate lead times from suppliers wherever possible. This helps your business understand the best frequency for replenishing inventory.

Periodic method

Periodic inventory replenishment is a method of checking whether inventory needs to be replenished at certain time intervals. In this method, businesses don’t replenish stock at any time other than the predetermined periodic times. 

Inventory levels can be assessed and replenished:

  • Daily
  • Weekly 
  • Bi-weekly 
  • Monthly  
  • Quarterly 

The frequency with which this is done depends on the business’s products and customer demand. Businesses with predictable customer demand and large warehouse capacity often employ this method. 

This approach is harder for larger retailers to manage as it offers limited visibility into inventory levels. 

Reorder point method

The reorder point replenishment method is based on stock levels rather than time periods. For example, if one of your product lines typically has 1000 units in stock, a possible reorder point would be when the stock reaches 300 units. The reorder point triggers at 300 units, and then 

purchasing stock orders are placed to replenish the stock back up to 1000 units. 

Inventory replenishment best practices for this automation reorder point method requires real-time inventory tracking software for accuracy and optimal stock levels. The reorder point method maintains consistent inventory levels to avoid stockout issues. However, you may have excessive stock or not enough stock when demand or supply chain shifts. 

Inventory replenishment policy: comparing the common approaches

Common approaches to inventory replenishment policies include the following three systems of reordering stock:

Min/Max policy

The min/max replenishment model triggers restocking when a product reaches a set minimum threshold. As one of the most popular replenishment methods and the simplest to implement, the min/max method goal is to keep inventory within a predetermined set range. Businesses set a minimum stocking level, which triggers reorder processes when the level is reached. 

To set min/max levels, you must calculate average daily usage to optimize warehouse inventory levels. This method tracks the current total stock level (usually the stock-on-hand and the stock-on-order total) for each SKU. A business case for a min/max inventory replenishment policy is for new products with no historical data or SKUs with predictable demand. 

Periodic order-up-to policy

In this inventory replenishment model, stock levels are periodically reviewed to determine the amount of inventory required to return stock to target levels. Compared to reorder point inventory replenishment, an order-up-to method indicates the level at which a new inventory order is placed to reach the target level. 

The periodic order-up-to-level formula typically looks like this:

Order-up-to-level quantity = target level – reorder point. 

In an order-up-to replenishment policy, the stock level will be affected by the vendor’s delivery lead times. Using this method, businesses can track beginning and ending inventory levels within a set accounting period to streamline financial statements. A periodic order-up-to system is ideal for small businesses without too much stock held in multiple warehouses.

Reorder point/order quantity policy

To calculate your reorder point accurately, consider each product individually. This is because different vendors will have varying lead times. It’s worth bearing in mind that this type of inventory replenishment method doesn’t optimize for maximum potential revenue opportunities. 

A reorder point inventory replenishment formula typically looks like this:

Reorder point = daily average sales x lead time 

To identify the right balance of replenishment methods for your business, consider implementing a combination of models for varying SKUs and approaches to meet seasonal customer demand. 

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What is collaborative inventory replenishment?

Collaborative inventory replenishment is the method of finding the balance between reordering inventory and maintaining optimal stock levels. This method seeks the most cost-effective method of inventory management by determining the frequency of reordering inventory items to aid the order management process.

Collaborative inventory replenishment enables higher shipping frequencies and reduced transport costs by sharing transport and logistical resources between suppliers. Collaborative inventory replenishment works to optimize deliveries to common distributors. 

Features to look for when choosing inventory replenishment software

When your business is seeking inventory replenishment optimization software, the key factor is making the software features work for you to effectively streamline your inventory processes.

Features to look for when choosing inventory replenishment software include:  

  • Forecasting methods
  • Optimized accuracy
  • Intuitive analytics

Forecasting methods need to work for both seasonal or non-seasonal products. And the system needs to be able to cope with ever-evolving customer demand shifts as well as market fluctuations for optimized accuracy. 

Multiple supplier capability

Chances are your business deals with multiple suppliers. In your quest for the perfect inventory replenishment software, check that your provider can handle multiple supplier capabilities and avoid lost sales. 

A seamless approach to inventory management is data integration from numerous suppliers with the ability to: 

  • Track inventory 
  • Order inventory
  • Replenish inventory 

Use automatic inventory replenishment software to set vendor conditions, such as minimum order quantities and case sizes, to create smooth purchase orders. 

In addition to handling multiple suppliers, your inventory replenishment software should integrate with multiple sales channels to seamlessly sync product and sales data. For example, if your business runs the majority of sales through Amazon, this integration is essential. 

User-friendly and streamlined navigation

The reasons for investing in inventory replenishment software include making life easier. Therefore, seek a solution that’s easy to use and implement into your existing systems. You must be able to place orders quickly and easily without complicated navigation. 

Implementing a user-friendly inventory management system means that all your staff members can quickly get to grips with the new software, and your business can benefit from the new technology’s features immediately.

Inventory optimization

Inventory optimization is the practice of determining inventory levels to: 

  • Meet customer demand 
  • Control logistics costs 
  • Avoid stockouts and overstocking

The best inventory replenishment software takes care of reordering stock and optimizing stock levels. This ensures that your business carries the right amount without overstocking or understocking. 

The main elements of inventory optimization are: 

  • Current inventory levels 
  • Storage capabilities 
  • Supplier lead times
  • Seasonal trends

To optimize your inventory, use demand forecasting analytics to estimate future demand for your products that predict the total sales for a pre-set time period. 

Optimizing your inventory: 

  • Saves your business money and warehouse space
  • Reduces carrying costs
  • Increases your business’s efficiency and profitability 
  • Improves cash flow 
  • Promotes customer satisfaction 

Empower your inventory replenishment by using Inventory Planner

Inventory Planner is the #1 demand forecasting and inventory planning software that enables you to accurately forecast demand and make data-driven replenishment decisions to meet the forecasted demand. It saves you time and money as you don’t need to go through the tedious forecasting and purchasing process. 

Inventory Planner connects to different platforms to provide better visibility of your customers’ demand for products. It predicts demand and offers replenishment suggestions at variant, warehouse, supplier, bundle, and assembly level.  

With Inventory Planner, you’ll also have a full view into your inventory performance, such as overstocked items, bestsellers, periodic sales performance, and more, so you can make informed decisions.

In a nutshell, you can use Inventory Planner to:

  • Make smart data-driven replenishment decisions to meet forecasted demand
  • Save time on PO creation, plan accurate purchasing budgets 
  • Replenish products at the right time by factoring in lead times and purchasing frequency 
  • Create a PO in just a few clicks
  • Plan your inventory budgets with an open-to-buy report

At its core, Inventory Planner’s automated inventory replenishment solution: 

  • Removes the manual burden of inventory replenishment processes
  • Allows for the most economical order quantities
  • Drives maximum productivity and revenue