Retail Dogma

Replenishment Systems in Retail

Replenishment systems in retail are systems that are set in place to ensure every product that gets sold at the store is restocked, so that the store does not get into an out-of-stock situation while the products are available at the warehouse.

Note: We are not talking here about purchasing or retail buying. This process has already been done and is connected to the sales budget/forecast, and based on that the products are ordered from suppliers and shipped to the warehouse.

Here we are talking about those orders that have arrived at the warehouse and are now being sent to stores for display and sale. When you place your orders, not everything you bought will be dispatched to the stores at one time. What is being dispatched is based on the store capacity and display strategy.

After the products are displayed they will start to sell, and when they get sold they need to be replenished from the remaining pool that is still available at the warehouse.

Why Is Stock Replenishment Important?

Stock replenishment is important in inventory management because it helps drive sales by avoiding out-of-stock situations through merchandise flow optimization.

This merchandise flow optimization is achieved when stores receive the right amount of merchandise they need to deliver sales at the right time.

If they receive extra merchandise the display will be cluttered and products will be all over the place, which will impact the shopping experience.

On the other hand, if they receive less merchandise than needed, or later than the right time, they risk losing sales due to stock in-availability.

Furthermore, stores that have poor replenishment systems risk losing market share on the long run. This is because when customers come every time and find empty displays or no stock for their favorite items, they will start to shift to the competition.

Also when stock is not being sent to stores regularly it will start to age and risk having higher stock obsolescence after some time.

Types of Inventory Replenishment Systems

Retailers usually don’t rely on manual methods to replenish stock from the warehouse. Rather, they set up systems in place that send the products when a certain trigger is fired.

This trigger will be based on the replenishment system they have set, which tracks the item quantity at the store, and sends only at the triggered level.

Here we are going to cover the most common replenishment systems used in retail:

  1. Sell One Get One Replenishment
  2. Min-Max Replenishment

Sell One Get One Method

Sell One Get One Replenishment System

In the sell-one-get-one method the store gets its initial allocation of merchandise, and every time a piece gets sold the store receives a replacement with the next delivery.

This method is very simple and makes sure each item is replaced once it is sold. If the store sells 2 pieces, they get 2 pieces the next time, .. and so on.

The trigger here is the sale of the item at the till in any quantity.

Replenishment will then keep happening as long as the item is still available in stock at the warehouse.

Min-Max Method

Min-max Replenishment System

In the min-max method the system is set to always have a minimum level of stock at the store and to never exceed a set maximum level.

For example, a store could set the minimum stock of a certain shower gel at 2 pieces and the maximum at 4 pieces (see pic). When the first piece gets sold, the store will have 3 pieces remaining, and so will not get any replenishment.

When the second piece is sold, the store now will have 2 pieces, which will trigger the system to send replenishment and stock the store back to 4 pieces.

The trigger here is the stock level at the store reaching the set min level.

To determine the min and max levels usually formulas are used to calculate the maximum display capacity and this will be the max, while the min will depend on the sales velocity (how many items sold per day) and the lead time for the replacement to arrive to the store (how many days), in addition to a safety level of stock.

Some retailers prefer the min-max system because it would mean less deliveries needed. The items are not going to be shipped every time a piece is sold on the system, but rather when certain level is reached.

This saves time, effort and money wasted in deliveries and processing.

Retail Replenishment Best Practices

It should be noted that even with automatic systems set in place there are still going to be some errors and human intervention will still be needed to ensure the systems are working properly.

Industry’s best practices for retail replenishment include:

  1. Adjusting min & max levels during events and peak times and resetting them afterwards
  2. Constant monitoring to stock levels by location
  3. Monitoring of sell through reports
  4. Consolidation (Inter-branch transfers) between stores for items out-of-stock at the warehouse
  5. Avoid scanning wrong/alternate barcodes at the cash desk or during transfers