Inventory Replenishment Methods & the Costs of Inefficiency
March 21st, 2018
If you’re reading this blog post, you’re probably interested in inventory replenishment because it’s part of your job.
But, if you think about it, you’ve been practising inventory replenishment all your life. When you head out on your summer road trip you check your ‘inventory’ of gasoline by looking at the gas gauge in your car. If the inventory is low, you ‘replenish’ it at the nearest station.
You do much the same thing with the stock you have on hand. You always check your ‘gauge’, or the count of stock you have on hand, and ‘fill-up’ or replenish it before it gets too low.
Needless to say, replenishing stock in your warehouse is far more complex than keeping your gas tank full. One big difference is that, instead of just a single type of inventory, you must separately track every raw material or SKU you stock and replenish each one on time according to a different schedule and/or method. If not, an inventory problem with any of them can stall your operations.
Also unlike the gas in your car, you can easily overstock your business inventory, which can get just as costly as a stock-out.
And the complexities of inventory replenishment continue to build from there. Let’s take a look at the methods of inventory replenishment and the costs that can happen when they are not done effectively.
The Methods of Inventory Replenishment
You might have only one ‘method’ for when to fill up your car, like whenever you reach half a tank. But to keep your business production running on schedule, you need to institute and follow a series of methods for replenishment.
1. Establish an Optimal Inventory Level
The fact that overstocking and understocking can both add to your costs means you need to establish and an optimal inventory level that helps you avoid both. That optimal level is generally considered to be the amount of inventory you need to ensure that you meet service level agreements for fulfillment of your orders.
2. Conduct Continuous and/or Periodic Reviews
Your inventory replenishment rules must outline a period on inventory reviews so you have accurate knowledge of inventory levels.
Inventory management systems allow for the continuous review of inventory levels, which reduces the need for more costly periodic reviews.
Even with automated inventory management systems in place, and definitely when they are not, periodic reviews are done at set intervals of time to determine inventory levels. Periodic reviews are the mainstay of manual inventory management and are often used in conjunction with IM systems, especially in cases where large inventory levels must be maintained, and to combat inventory shrinkage.
3. Set Reorder Points
When stock counts fall below a certain number, usually called the reorder point or reorder level, a replenishment order should be placed to maintain the optimal inventory level.
4. Determine Order Quantities
Once a reorder point is reached, you need guidelines in place to govern reorder quantities. There are two basic guidelines. The first is to order a fixed amount of inventory when the reorder point is reached. The second, often called an “order up-to level” triggers an order for the amount of inventory needed to return to optimal levels.
5. Plan for Safety Stock
In cases of unexpected inventory supply interruptions and/or delays, a safety stock of inventory helps you maintain your service levels.
The Costs of Poor Inventory Replenishment
As we mentioned, there are two basic dangers of not using good inventory replenishment strategies; being under-stocked and being overstocked.
1. The Costs of Being Under-Stocked
Whether you’re a raw materials supplier, a manufacturer or a wholesaler, being under, or out of stock can directly increase your costs in a number of ways.
Primarily, you may not be able to fill ordersor fill them completely, which can mean extra expense in backordering, added deliveries, etc..
You also may need to slow down or stop your workflow, which can also mean not having enough finished goods on hand to meet customer demands.
2. The Costs of Being Overstocked
Being overstocked can put a strain on your facilities, your inventory management systems and your handling costs. Simply running out of space can mean compromising the safety and efficiency of the space you have, or needing to spend time and money finding new space.
The Hidden Costs of Your Inventory Replenishment
We’ve looked at many of the common costs of inefficient inventory replenishment. But, even when you use what otherwise seem like effective replenishment methods, there are still other costs, those that most businesses don’t track or even know exist, that can eat away silently at your profit margins.
These ‘quiet profit killers’ can lurk in places far removed from the inventory on your floor and they can end up costing you far more than simply being ‘out of stock’.
To learn more, download our free ebook “Quiet Profit Killers – The Hidden Costs of Inventory Management”.
In addition to finding out where costs may be hiding in your replenishment methods, you’ll also discover the hidden costs of Inventory Waste and Inventory Shrinkage.
About the author
Israel Ellis, CEO
