Maintaining the right amount of available inventory is vital to ensure a business runs smoothly and efficiently. With too little inventory, the seller risks being unable to fulfill customer orders; but having too much inventory on hand increases costs and negatively impacts cash flow. A well-managed inventory replenishment approach helps the company ensure it has just the right amount of inventory at just the right time, so it can maximize revenue and profit, minimize cost and keep customers happy.
What Is Inventory Replenishment?
Inventory replenishment, also referred to as stock replenishment, focuses on ensuring the company reorders items from suppliers in time to meet customer demand without accumulating excess inventory. For retailers, distributors and manufacturers that have multiple inventory storage locations, inventory replenishment can also refer to the process of moving inventory from reserve storage to primary locations so that it can be used to fulfill orders.
Inventory Replenishment vs Inventory Control
Inventory replenishment and inventory control are two key aspects of inventory management. Inventory control involves managing and tracking inventory that's already in your warehouse or retail outlet. Inventory control helps businesses organize their inventory efficiently, determine how much they have and track each item. In contrast, inventory replenishment aims to optimize reordering of items so the company always has the optimal amount in stock to meet customer demand.
- Inventory replenishment helps companies make sure they always have the right amount of stock on hand to meet customer demand.
- There are several ways to determine when to reorder inventory based on current inventory levels, periodic inventory counts and customer demand.
- An efficient inventory replenishment system helps businesses increase profitability by reducing expenses and minimizing overstocking and stockouts, while holding down shipping and carrying costs.
- Inventory management software can improve real-time visibility into stock levels and automate complex inventory replenishment processes.
Inventory Replenishment Explained
Efficient inventory replenishment carries many pluses for businesses, such as avoiding stockouts or overstocking, trimming expenses like shipping costs and building customer satisfaction. While vitally important, for businesses that store hundreds or thousands of inventory items, the task of inventory replenishment can be extremely complex, in part because items may need to be restocked at different times and at different rates. The problem can be particularly acute for companies that sell via multiple channels and need to manage inventory for all of them. Because of the complexity and dynamic nature of inventory replenishment, paper-based manual approaches rapidly become impractical. As a result, retailers, distributors and manufacturers are increasingly using technology to get a better companywide view of their inventory status and to automate the replenishment process.
How Inventory Replenishment Works
The determination of when to reorder items can be based on a number of factors, including customer demand, supplier lead time and desired levels of safety stock. When inventory levels dip to a predetermined reorder point, the team that manages inventory contacts the appropriate suppliers. Depending on the size of the business, the team involved in managing inventory can include warehouse managers, planners, purchasing specialists and warehouse employees. Team members may be assigned to specific tasks such as counting inventory or forecasting.
Why Is Inventory Replenishment Important for Businesses?
With an efficient inventory replenishment process in place, companies can promptly fulfill every order, keeping customers happy while driving higher profitability and reducing costs. Some key benefits of a solid inventory replenishment process:
- Helps avoid stockouts. An effective stock replenishment strategy helps businesses prevent stockouts and backorders — the dreaded predicament of being unable to immediately fulfill orders because there’s no stock on the shelves.
- Improves customer satisfaction. Eliminating or reducing stockouts means companies can fulfill more orders faster, which translates into greater revenue and profit. In contrast, too many stockouts can create spiraling customer frustration that ultimately drives customers to competing suppliers.
- Prevents overstocking. Efficient inventory replenishment helps companies avoid holding too much stock, which can be almost as detrimental as not having enough. A glut of merchandise can create a multitude of problems. If stock is perishable or its value declines over time, overstocking can lead to unsold or obsolete inventory that must be written off or sold at a discount. Overstocking also leads to increased carrying costs and ties up capital that could be better used to fuel business growth.
- Lowers shipping costs. Optimizing stock replenishment helps companies keep shipping costs under control. When companies reorder at the right time for goods to arrive by the time they're needed via regular shipping, there’s no need for a last-minute scramble and expedited shipping to obtain the inventory necessary to fulfill customer orders. Efficient replenishment can help companies make sure inventory is optimally divided among fulfillment centers, and that it ships from locations nearest to customers.
What Factors Impact Inventory Replenishment?
Even for companies with a well-planned stock replenishment system in place, unexpected events can rock the boat. These might include:
- Sales that deviate from forecasts: Sales forecasts are always subject to changing conditions, including fluctuations in customer demand. For example, customers may suddenly lose interest in a formerly hot-selling product because a lower-priced competing product becomes available.
- Limited warehouse space: A lack of warehouse space — or competing demands for the space available — may limit the company’s ability to store enough inventory to meet projected demand. As a result, the company may have to adjust its inventory replenishment plans. For example, it may be necessary to order smaller quantities more frequently.
- Supply-chain lead times: Lead time is the length of time between when the company places an order and when the goods arrive. Supply-chain disruptions can cause lead times to lengthen significantly. For example, vendors experiencing a shortage of raw materials may fail to deliver components to you on time, affecting your ability to supply finished products to your customers.
Inventory Replenishment Methods
Companies can choose from among several approaches for determining when to reorder inventory items and ascertaining how much is needed. The choice of method may hinge on factors such as the type of business, whether customer demand remains steady or fluctuates and the specific inventory items involved. It may make sense to use a combination of methods for different inventory items.
Reorder point method: This method triggers replenishment when the quantity of an inventory item falls to a specific threshold, known as the reorder point. The goal is to order fresh inventory so that it arrives before the amount drops below a predetermined level of safety stock. The safety stock cushions the company against potential stockouts. The reorder point typically varies among inventory items because it depends on the demand forecast, lead time and required safety stock level for each item.
The basic reorder point formula is:
Reorder point = (average daily usage x lead time) + safety stock
Top-off method: This method is popular among retailers and distributors that have a number of rapidly moving inventory items. This approach replenishes picking shelves during slow periods or downtime, ensuring that stock of fast-selling items is always available to fulfill orders when demand picks up.
Periodic stock replenishment method: With this method, companies review inventory levels at set intervals to determine whether they need to replenish certain items. Companies with huge warehouse capacity, predictable customer demand and low risk of stockouts often use periodic stock replenishment. One disadvantage is that inventory levels are only gauged at those periodic review times, so there’s no way of knowing if a product is running low between those dates.
On-demand method: This method bases ordering on customer demand. Some companies may reorder only what’s necessary to fill current orders, while making sure they have adequate safety stock to avoid stockouts caused by demand fluctuations. Sophisticated approaches use software to determine reorder points based on current and historical sales, lead times and inventory levels.
Inventory Replenishment Best Practices
To optimize inventory replenishment, it’s necessary to have accurate information about current stock levels, customer demand and supplier lead times. Best practices include:
- Conduct accurate inventory counts. Effective replenishment depends on accurate information about existing stock levels. Physical stock counts can complement automated inventory management systems and regular cycle counts, verifying the accuracy of inventory information to provide a firm basis for replenishment strategies. Physical counts can also identify potential problems, such as theft. Businesses can use a variety of stock counting methods, including barcode scanning, spot checks and periodic stocktaking.
- Utilize software for demand-based forecasting and replenishment. Efficiently managing replenishment for hundreds or thousands of items rapidly becomes too complex to handle manually. Leading inventory management software can take into account information about current and historical sales to calculate reorder points and alert inventory specialists when it's time to reorder to facilitate demand-based forecasting.
- Focus on supplier reliability and supply-chain visibility. Suppliers can help make — or break — your business, so it’s essential that you can rely on them to provide quality products when you need them. For those times when you’re dealing with in-demand items, it makes sense to have more than one supplier.
- Consider the big picture. Inventory replenishment is just one part of the larger inventory management process. To get the most benefit, aim to optimize every step in the process, including receiving, picking and shipping.
Manage Inventory Replenishment With NetSuite
Comprehensive inventory management software can help companies automate replenishment, increasing revenue and profitability while decreasing cost. NetSuite Inventory Management provides businesses with real-time, companywide visibility into inventory levels across locations and sales channels. It automatically tracks orders and inventory levels to dynamically determine reorder points based on historical or seasonal sales demand, lead times and existing stock. This helps to ensure that companies have enough stock to fill anticipated orders, while minimizing the likelihood of carrying excess stock.
Efficient inventory replenishment is a critical element in any inventory management strategy. It helps retailers, vendors and suppliers ensure that they always have the right amount of inventory on hand to meet customer demand while minimizing excess inventory. Automated inventory management systems enable companies to manage the complexities of inventory replenishment more easily, driving increased profitability while reducing cost.
Inventory Replenishment FAQs
What are the inventory replenishment types?
Inventory replenishment types include the reorder point method, in which a company reorders inventory once stock falls to a predetermined threshold; the top-off method, which allows for products to be replenished during pickers' slower periods; the periodic stock replenishment method, in which companies review inventory levels at set intervals to determine whether an order is needed or not; and the on-demand method, which bases reordering on customer demand.
What is the purpose of inventory replenishment systems?
Inventory replenishment systems help retailers, distribution and manufacturing businesses maintain the right amount of stock so there’s never too little or too much at any time. Some systems also calculate safety stock and reorder points, forecast and meet customer demand, and pinpoint obsolete items. They can help companies minimize costs.
What are replenishment orders?
Businesses place replenishment orders to refill stock on hand. Orders are often triggered when stock dips below a minimum quantity. The minimums are predetermined and need to be reviewed often to make sure that demand is met.
What does replenishment mean in a warehouse?
In a warehouse, replenishment means the process of restocking warehouse shelves with new goods from production sources or suppliers. It can also refer to the movement of materials or goods from storage to the picking shelves.