According to a study published by Harvard Business Review, a stock-out leads to the loss of 40 percent of customers that would otherwise have proceeded with the purchase. Another 45 percent are only retained if provided with a fitting substitute.
This article will cover the essential tools to help you avoid failing to keep customers due to stock-outs and losses associated with overstocking. It will cover the basics of establishing a stock replenishing system and describe possible demand forecasting strategies.
Description of a successful Stock Replenishment System
The job of stock replenishment is to keep inventory moving optimally across the supply chain by maintaining efficient order and line item fill rates. Improving your business’s inventory replenishment practices may significantly enhance its operational effectiveness, lower supply chain risk, and increase bottom-line profitability. This article will give you an understanding of the fundamental principles that lead to healthy stock management.
The cornerstone of any successful solution is implementing the tools that would help highlight and understand existing and future problems. One of the most widespread processes that all retailers, vendors, and manufacturers engage in regularly is stocktaking or stock counting.
Stock-outs, overstocking, stock theft, and stock shrinkage are all preventable with regular stocktakes. Additionally, it will allow you to determine how many of each product you currently have in stock, which aids in precise inventory tracking.
There are two strategies for stock review:
- Continuous review is fit for larger businesses with a quicker sales cycle or the means to continuously measure their stock levels. This method implies that an automatic system will be responsible for the review.
- A periodic review sets a time frame within which the review takes place. Fit for smaller companies or those having the means to revisit stock levels manually.
Previously collected data should help determine the specific needs of your business. While it might seem trivial, perfecting stock tracking is crucial for further steps.
Inventory Reorder Point
Most inventory management systems follow specific replenishment rules to increase their automation. One of the key concepts is the “reorder point.” When the stock level reaches an established point, the system initiates replenishment. The reorder point designates when stock has to be rebought, considering both current and projected demand and the time it will take your supplier to deliver the new order.
You can calculate the optimal reorder point yourself – first; you need to know your safety stock. Safety stock, or “buffer stock,” is the reserves that a business has over the amount that is usually required. For example, there may be a supplier delay or a sudden increase in demand that you failed to account for in your demand forecast. In any case, safety stock protects you in case of unanticipated events.
This is a simple formula to establish the best safety stock size:
(Maximum usage per day x Days of maximum lead time) - (Average usage per day x Days of average lead time)
To determine your ideal reorder point:
Lead time demand in days + Safety stock in days
Obtaining the knowledge of your optimal safety stock size and reorder point is crucial to optimizing the business’ replenishment process. It allows you to adapt swiftly and effectively to changing demand while maintaining appropriate stock levels.
After having established the frequency of reorders, the next question is quantity. There are two ways to determine the size of the following order:
- Fixed Order Quantity: the most straightforward option; you place the same fixed order quantity each time your stock hits the reorder point. As soon as the stock hits the reorder level, you may replenish it, which is perfect for firms that use continuous review.
- Order Up-To Level: With this strategy, your company starts each review period with a specific amount of items stored. Any additional stock necessary to meet that level will be ordered. This approach fits brands with fewer frequent evaluation periods. You should also use the demand and lead time projections to set the order up to level because it must endure until your following periodic assessment.
Luckily, today’s systems automatically track and update stock movements without user intervention can take on this responsibility. It results in substantial time savings and lowers the possibility of human error.
Communication with the suppliers
This point is easy to overlook; however, maintaining an open communication line with your suppliers helps to significantly lower the number of accidents or abruptly delivered bad news. Interacting with companies directly related to your stock supply might open new opportunities or prevent significant accidents.
The reports of the sales representatives should include information about whether there was a delay in the delivery time; are the current demand predictions being met and is there anything new at the store that might affect our sales?
The key to excellent stock replenishment is to optimize inventory levels at each stage of the supply chain. You may accomplish this by centralizing inventory planning activity so that forecasting and replenishment operations are carried out with a comprehensive supply chain picture.
Additionally, improving end-to-end visibility might be the key to success regarding supply chain efficiency. End-to-end visibility is the capacity to track, monitor, and readily report on all freight movements from origin to destination and everything in between. When you fail to offer your suppliers precise, real-time information about your current stock levels, miscommunication may delay the replenishment process.
Installing and fine-tuning data-gathering systems, automating reorder points, keeping active connections with suppliers, and centralizing the system are critical to ensuring an ongoing flow of products and a replenishment cycle, driving the profit of your business. However, you can do more.
Modern businesses balance the risks of insufficient stock, such as missed sales objectives or expensive backorders, and the expenses of retaining goods, such as warehousing charges, opportunity costs, and cashflow issues. But rigid approximations can hardly protect from unfailingly fluctuating demand. Utilizing statistical demand forecasting techniques relieves those risks.
The job of demand forecasting is to pass complex judgments about previous customer behavior and combine this data into coherent predictions. By utilizing more exact demand forecasts, you may avoid out-of-stock situations that harm your retailer’s reputation and weaken client loyalty. For example, an automatic system may highlight the start and end of the high-demand season for certain goods and provide information about the differences across the stores. It can uncover that people in town A start shopping for Christmas sweaters in September, while inhabitants of town B only do it in November.
There are several approaches to demand forecasting:
- Barometric forecasting constructs predictions about future results based on the current data using statistical methods. It mostly projects.
- Trend projection utilizes past data, such as growth patterns, to create a sales forecast. This method provides an accurate prediction of demand in the short term. However, relying exclusively on sales history may be risky without considering other factors, especially if you need to establish a long-term demand plan for your supply chain.
- Exponential smoothing combines the tools of the previous two methods. It estimates future sales using both historical data and seasonal variances. Because demand planning using exponential smoothing may be based on a limited dataset, it’s a valuable quantitative tool for startups.
- Econometric forecasting integrates data on demand with facts about potential external demand-influencing factors. While econometric forecasting requires more intricate statistical forecasting techniques than other alternatives, it results in the most precise demand estimate.
You must continually use the tools at your disposal to iterate and enhance your process; it is not enough to merely gather and use data at first. Choosing and implementing the suitable method can significantly impact the work of your stock replenishment cycle and the entire business. Smart demand forecasting methods will protect your business from demand shocks, allowing you to avoid losses while increasing profits.
A flexible stock replenishment system protects a business from internal and external shocks, be it a late delivery or a larger change in consumer preference. Finding the best strategy for the specific company is a long process that requires tuning many components, but it leads to a smooth flow of the entire supply chain and profits for the business.
Finding the best stock replenishment system
Choosing a stock replenishment system that would suit your company best is not a trivial matter. The selection of various systems is wide, and each has a distinct focus. This article will provide an overlook of the main questions that would help you determine the specific needs of your business.
- Centralization opportunities: a good stock replenishment system can achieve much more than increasing order management efficiency. Furthermore, it should strengthen the link between other site components, such as payment and delivery modules.
- Omnichannel: a stock replenishment system should focus on a range of sales channels: including websites, marketplaces, social networks, etc. This function establishes a single trade analysis interface for all data consolidation.
- Scaling: It is especially rare for an online business to witness a stable sales number. A stock replenishment system adjusts for any turnover and allows businesses to expand later easily.
- Forecasting: a good stock replenishment system analyzes sales and notifies you of potential issues. For example, by monitoring order status dynamics, the system may predict a shortage of items in a given time frame.
- Automation: the stock replenishment and order management system can cut labor costs and save time. Complex purchasing processes are streamlined through automation, which also evaluates inventory and generates periodic reports.
- Personalization: several APIs are available to customize a stock replenishment system. They can be found on the internet and easily implemented within a month.
LEAFIO Inventory Optimization increases the performance of order management over the entire life cycle. Implementing LEAFIO advances automatic order quantity calculation, automatic order generation and dispatch, automatic order editing based on supplier feedback, and order fulfillment control, in addition to clear system organization and operational processes with orders that benefit both the Line Manager and the Head.
Decreasing resource-intensiveness of the management process relieves managers of easily automated work and allows them to channel their energy into other areas. Due to precise demand forecasts, product availability rises, overstocks are decreased, and turnover improves.