You believe a weekly replenishment process that includes reviewing plan, inventory, and sales to make purchase order decisions is profitable. Some people think weekly replenishment increases turns for the business. Your weekly review and reorder for inventory replenishment also suggests razor sharp exception management processes are in place, ready to act. Weekly review and reorder means there is little chance for out-of-stocks or extraneous freight costs to occur. Historically, these ideas promote the belief that human review and intervention on a weekly basis is the correct and profitable course of action.
The Inventory Replenishment Methodology a supply chain solution uses to flag when an inventory replenishment order should be placed is critical to consider when reviewing supply chain software. Review any of the mainstay inventory replenishment systems, and you see what becomes obvious – there are only two methodologies possible. The system signals an inventory replenishment order is needed based on a combination of date, plan, and demand (top down) or based on a combination of service goal, demand, and available inventory (bottom up). Everything after that flag is a mix of tools and features that differ in each software package. While these two inventory replenishment methodologies have similar features and names, the critical things for you to know are:
- How to identify which methodology is used by your software (or software you are reviewing).
- The costs and goals of each methodology and how the differences impact each line of business in your company.
Forecasting replenishment correctly and following standardized inventory replenishment processes continues to deliver significant returns to retailers, wholesalers, and manufacturers. For the retailer/ wholesaler/ manufacturer ready to move away from legacy technologies, there are huge opportunities that cost 50-90% less than legacy systems. A forecast accuracy in the 90% range we know delivers a significant shareholder value increase of 15% or more.
Several documented events support these claims (click a link): a retailer achieved a 25% inventory reduction and a 3% same store sales increase in 90 days, the sales and inventory trend continued going forward (press release), Dr. Mentzer’s 3 page story concerning a collection of businesses that delivered an average 15% shareholder value increase via forecast accuracy improvements which directly impacted forecasting replenishment, and The Home Depot Chairman and CEO, Frank Blake, specifically stated in the 2011Q4 earnings briefing that supply chain investments continued to provide significant benefits including increased turns and same store sales.
Inventory Investment Buying (forward buying) is a strategic part of the buying role that many companies don’t realize today. The truth: Investment Buying that is based on accurate demand forecasting and effective inventory optimization processes delivers significantly higher gross margins, better GMROI, and balanced inventory levels.
Buying and maintaining inventory is often viewed as a cost center and companies struggle with these 4 basic questions:
- When do I buy?
- What quantity should I buy?
- When I buy, how can I balance inventory levels?
- A vendor has offered a discount, how much more, if any, should I buy?
Promotions are Vital for Greater Revenue and Reduced Inventory
In-Store trade promotions are the lifeblood of the supermarket industry and discount retailer. Trade promotions include products featured in ads and in-store circulars, products displayed on end of aisle caps or away from their normal shelf location, and products with temporary price reductions. They create Trial and Repeat Purchases AND create all important Impulse Sales. You know impulse sales; they are all of those items you purchased that were not on your shopping list!
According to a recent study from The Nielsen Company, 42.8% of grocery purchases are sold on promotion, up from 40.8% a year ago. Drug stores, too, sell a significant portion of products on promotion, with 40.4% of sales linked to displays and/or features.
What is Lead Time? Why Is it Important?
Lead Time is the length of days between when an order is placed and the date the goods are available for use. The largest impact to lead time accuracy is found by comparing expected receipt date to actual receipt date for each purchase order. In simple terms, the variance is calculated as the absolute value of the difference [expected or requested receipt date - actual receipt date] for each line on the purchase order. These variances in days across multiple purchase orders establish the need for lead time accuracy testing and lead time forecasting.
What is the Impact When Supplier Lead Time is Not Accurate?
Suppliers provide an estimate of lead time, but these numbers are not always accurate. The differences between your expected receipt date and actual receipt date can become expensive from the resulting unplanned over stocks, out of stocks, and deflated consumer opinions. Lead time tracking and lead time forecasting are mission critical to the success of your supply chain. Lead Time Forecasting, like Demand Forecasting, should use a set of math algorithms to calculate the correct lead time days to use in planning purchase orders. Also, like Demand Forecasting, the Lead Time Forecast should move up and down according to changes in market, business influences and seasonality of product.
Key Limitations to Sales Forecasting
Sales Forecasting, by its very nature, doesn’t know why sales rise or fall and cannot connect events to sales behavior. For example, when sales were down 20% four weeks ago, you probably knew this was due to constrained supply which created out of stock issues. The sales forecasting system will react to the 20% drop by lowering the forecast. The resulting inventory replenishment orders from the new forecast will be low, creating a repeat scenario of lost sales again next month.
What is Sales Forecasting
Sales Forecasting is the easier of the two choices: you load your sales history into the sales forecast engine and the system delivers a sales forecast. Sales Forecasting is critical for the retail business to create financial plans with the banks, plan sales growth, and plan resource strategies. Sales Forecasting systems have a ‘vanilla’ approach that is clean and simple, and it works without issues for the most basic of products. Legacy systems often will pair the sales forecasting with their demand planning tools to determine inventory replenishment for the business.
Problems with Seasonality
The problem with seasonality is that it can change each year, and your current fiscal year may not map back to your seasonal index. Sales from the last seasonal event may impact your base demand forecast to create inaccuracy. Easter is in a different month and fiscal week this year. How did you account for the differences when purchasing Easter inventory for this year? Next year, Easter is again in a different month and will be several weeks different from this year. Thanksgiving is a holiday that based on the time of year can add or subtract a whole weekend of December holiday shopping. There are two issues that need to be reviewed and adjusted: the current year fiscal week seasonal index values and the base demand forecast.