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Replenishment Optimization: 5th Essential Step to Expert Demand Planning
Maintaining a proactive, accurate order quantity is the end result of great inventory component management. Thanks to replenishment optimization technology, what used to be a function of tireless hours spent each day manually constructing orders is now a swift and efficient part of a demand planning professional’s morning.
Our ‘7 Essential Steps’ series continues today with #5 – Replenishment Optimization. The order quantity for replenishment is actually the calculated result of the first 4 steps to expert demand planning:
- Demand Forecasting
- Lead Time Forecasting
- Order Cycle Optimization
- Service Level Management
For long-tenured demand planners and inventory analysts, this smart replenishment optimization process is a dramatic change from the old-school, tactical ways of sitting down to build an order. Their role has changed from building the order quantity to managing the key components, which are used to create replenishment order quantities for any type of item from wine and spirits to HVACR parts to furniture.
Today’s advanced replenishment optimization solutions streamline this process and ensure that each of the first 4 components are calculated using advanced science and proven techniques, including AI and machine learning. Even price optimization solutions are being woven into the demand planning story to further refine financial results. And take charge of replenishment.
So what’s the process? How do you properly manage the 4 key components so that daily replenishment becomes a smooth and automated review process? Start your replenishment strategy by proactively applying science to Steps 1-4:
- Demand Forecasting: What are your customers’ buying patterns? What influences them to buy? Science can help you simulate these needs, respond to rapid demand fluctuations, incorporate market knowledge and human input, identify and capitalize on opportunities affecting particular categories and locations.
- Lead Time Forecasting: We all know the impact of long lead times. Science can help by combining lead time history, demand deviation and seasonality with real-time analysis. So you can understand the reliability of suppliers and put inventory behind the winning SKUs.
- Order Cycle Optimization: Science helps you quickly see the economics of slow-moving, low-cost items, combined with intelligent buying multiples, to achieve the most effective order cycle possible.
- Service Level Management: Supply chain planning algorithms calculate a safe amount of inventory to protect against the inherent forecast error you face every day. This ensures the forecast is maintained regularly, seasonal profiles are applied when needed, and proper adjustments are made when called for.
Each day, those elements will combine to build precise replenishment orders. A replenishment optimization solution makes it super easy and efficient to aggregate data and build final order quantity that will deliver the best financial outcome.
Two Key Questions: How Much to Buy and When?
The first 4 elements make up the decision of how much to buy, but they also make up the critical decision of when to buy. You have to keep all elements updated at all times so that they can trigger a replenishment order on time.
In the Dinosaur Days…
You’d sit down to create an order, then realize that the supplier had been taking 5 days longer than normal. You learn from this. And next time, you’d buy more. Or maybe buy 5 days earlier. In either case, you’re giving up margins which – as a distributor – you don’t have much of these days!
When to Buy?
Is an order needed today? To answer this, FIRST, assemble the 4 calculated components for each item:
Demand Forecast, Safety Stock, Lead Time Forecast, Order Cycle
THEN build your Low-Stock Point (Reorder Point) and Order-Up-To-Level:
LSP = Safety Stock + Lead Time OUTL = Safety Stock + Lead Time + Order Cycle
NEXT, compare the Stock Status balance to the LSP for each item and the line collectively:
Stock Status Balance = On Hand + On Order – Backorder/Reserve
We’ve shown this diagram before, but it’s sharing again for context. Each dot on the Depletion Chart is the balance of an item:
NEXT, analyze the supplier picture as a whole:
Retail and wholesale distribution businesses are very different from manufacturers. You have to review and replenish ‘joint orders’ including all of the active items offered. It’s too expensive to place unique orders for individual items each day.
The Depletion Chart above displays all of the items in one supplier line. It includes:
- Aligning each item’s components
- Plotting each item’s stock status position in the depletion process
- Determining if enough of the items, in aggregate, warrant triggering the order as ‘Due’
FINALLY, based on all of the item’s unique service goals, determine an allowable amount of lost sales.
Is it Due Today?
- If enough of the items in red, below their Low Stock Points, will potentially lead to out-of-stock values that exceed your service goals, the supplier will be considered ‘Due’.
- If the order is not yet due, a replenishment optimization solution can offer a simulation of when the order will be due… very helpful for future planning.
- If the order is ‘Due’, it’s time to determine how much to buy.
Determine the quantities for each item:
The red items are ‘in need’. Items in the red zone are triggering the need to be replenished. They are profit stealers. Replenish those items back up to their order-up-to-levels. Your goal is to buy them up to the same time supply, so that they can deplete together through their expected demand, and arrive at their low-stock points as close to together as possible.
The blue items are ‘needed to establish balance’. The items in blue are not in need on their own. However, between now and one order cycle from now, those items will hit their individual low stock points and will want to be replenished, also.
Remember, we already determined that we replenish in a joint replenishment method. Therefore, you will also buy those blue items up to their order-up-to-level.
By doing this, all items will be in harmony and live at the same time supply. With strong, seasonally adjusted demand forecasting, the right safety stock amounts and the correct lead times, the entire line should follow a similar depletion path and come due in unison, or very close to unison, the next time.
Elements 6 & 7 Will Put the Final Touches on the Order
Your replenishment optimization solution will create order quantities needed to maintain desired service levels. Before the order is considered ready to accept and transmit to the supplier, you’ll need to complete the 2 final steps of the process:
Step #6 will respond to deal opportunities, purchase any promotional quantities needed, and analyze overstock balancing or secondary source opportunities.
Step #7 will ensure a valid order. The system will round each order quantity to their chosen buying multiple or intelligent convenience multiple. In addition, if the overall orders need to meet a supplier’s minimum or chosen bracket level, the proper amount of additional time supply will be added evenly across the line of products.
These 2 final elements are critical steps requiring sophisticated processes and science. We’ll cover those in greater detail as we wrap up our 7 Essential Steps series.
Doing it Wrong
There are some poor habits that have become common practice, causing excess time and expense. As you move from good to great in your replenishment process, work to remove these common pitfalls:
- Not reviewing each item and each supplier each day to ensure in-stock positions and highest-efficient inventory levels
- Determining the item’s component values on the day of buying; those values are needed prior, as they determine the important decision of ‘when’ to buy
- Allowing the days’ emergencies and emotions to play a part in order quantity decisions
- Only replenishing items that are in need, without balancing the line; you must consider buying all items that will hit their low stock positions in the near future
Replenishment Solutions Flip the Script
A best-in-class replenishment optimization solution can deliver order quantities that are so precise and reliable, they can be considered for automatic replenishment. This flips the script on inventory planning, freeing up human capital for more strategic initiatives.
In the old method, the majority of an analyst’s day was spent creating the order. Even when reports and formulas were used, any suggested order quantities were seen as starting points.
Last-minute analysis was done on several components, recent demand patterns were analyzed, and orders were built to brackets. Especially painful and time-consuming was the process of padding A items. The process was exhausting, and left little time or inspiration for proactive analysis of item opportunities. It was a game of chase from behind.
The new, technology-enabled replenishment strategy delivers component precision, item awareness, and perfect orders that are ready to transmit to suppliers first thing in the morning.
Doing it Right: Replenishment Best Practices
Top-performing analysts follow this simple formula for success:
- Strong item component setup
- Disciplined daily replenishment
- Targeted, ongoing refinement of the components through intelligent analytics
They complete their replenishment orders quickly, very early in the morning. The review process consists of looking for surprises, ensuring consistent order patterns, and scanning opportunities for deals with suppliers.
Very little time is spent in the detail of orders. However, if the analyst sees a quantity they want to question, they don’t ever change the order quantity. They dig to find the issue in the components and fix any problems long-term.
Over time, experience will lead them to very rarely question order quantities and simply approve their orders.
Top-performing replenishment analysts invest their best time and tools in proactive action, finding unique patterns in item categories/sectors and fixing long-term problems.
Benefits of Technology-Enabled Replenishment
Time Savings: Analysts who used to spend 6+ hours each day building orders can now review and release orders in a matter of minutes.
Service: By maintaining excellent inventory components ahead of time, and reviewing the inventory positions each day, in an automated way across hundreds or even thousands of SKUs, you can consistently replenish on time – with service goals maintained or even increased.
Lower Inventory: When analysts replenish using old manual methods, they couldn’t review every item every day. They had to create schedules to review certain suppliers – weekly, every other week, or even monthly. This always required extra inventory in case sales were strong prior to the next review day. With replenishment optimization technology, that emergency inventory is no longer required.
Today’s smart replenishment processes and tools put inventory analysts in a position to streamline and automate replenishment into a smooth and automated review process, rather than a time-consuming guessing game. They can continually refine their item components to deliver massive organizational value.
If you or your team is spending more than 45 minutes each day building supplier orders, it’s time to research a better way.
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Next up: Special Orders
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