Why Your Inventory Replenishment Costs will Explode this FallThe speed of business operations today is outpacing the level of insight and the execution capabilities of legacy inventory replenishment software. In the new omni-channel marketplace, sales and market behavior can, as they used to say ‘change on a dime’, today we say ‘change on a tweet’. Companies are looking for different processes and new systems to increase their view of inventory replenishment activities and make better decisions to support their customer’s expectations, their market share, and profitability.

Yesterday’s Tech is Raising Today’s Inventory Replenishment Costs

For many companies, one major issue is their Inventory Replenishment systems which were never designed to support today’s marketplace. Most inventory replenishment and demand forecasting systems in use today had their base code created 10-20 years ago. Changes to a software base code is a multi-million dollar event for inventory replenishment software, most companies make upgrades to only pieces of the software. Compare this to the processing Google completes, billions of answers delivered from a server farm where it’s reported the average machine cost less than $1000. The point, we can run on cheaper hardware and deliver smarter answers. The problem isn’t our ability to write smarter software and run on inexpensive hardware, the problem is so many are not running smarter software on less expensive hardware. However, our Inventory Replenishment cost issues are not just tied to old software and hardware, we need new process management.

Demand Forecasting - What's New in 2013

Technology and the Marketplace have moved the Goalposts: Inventory Replenishment is Harder to Manage

Inventory Replenishment has often operated with two goals: stay on plan (calendar & budget) and make the forecast number and plan somehow be the same number. This plays out in the way we manage our purchases, often constrained by the plan in a top down buying model. If we need inventory purchased for replenishment, we must keep the order within the plan. Many systems ‘dance’ around this fundamental issue by creating a bottom up plan and layering in a min/max inventory replenishment model that stays within the financial constraints of the plan.

The root problem: most legacy inventory replenishment software delivers a buy signal from a company level top side plan.

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A problem that Raises Your Inventory Replenishment Cost

The problem is a plan based buy signal at the company (top side) level which is connected to dates (month or week) and budget. In a customer centric environment where the business wants to respond to demand at the customer level, like internet sales, a top down buy signal is too late and often focuses dollars in the wrong direction. Why? because the plan was based on what we ‘thought’ the market was going to do when we created the plan. We see examples of this: out of stocks that were caused by waiting too long to place a replenishment order, the lead time days were more than your days’ supply when you placed the order or those crazy customers consumed your product faster than the plan and no money is available to buy additional inventory.

Why do costs rise? The market changes faster and leaves less room for error. You are asking your inventory replenishment system (or Excel?!?) and replenishment processes to provide answers that are outside of their design. Think about it, only a few years ago we reviewed monthly or weekly reports, our time to respond to market, competition and customer changes was a week or a month. That is not the story today and those market changes have only just started to be seen in the marketplace.

 

The Answer: In a marketplace where consumer centric is the goal, the buy signal must come at product location level (service level). Also the buy signal must coincide with enough products from the same supplier to meet optimum shipping minimums and space and carry cost constraints. Again, most legacy software was never written to optimize inventory based on a product/ location buy signal. The math needed for this type of optimization is not simple and cannot be completed in excel – it is called inventory optimization.

A solution is Service Driven Replenishment

A buy signal that is based on individual product/ location performance is consumer centric. A service driven replenishment system will always provide better product availability with lower inventory costs. It also provides additional benefits: better demand forecasting, optimized inventory decisions, and increased access to demand signals across your supply chain. The combination of these delivers higher profitability than top down legacy systems.

Inventory Replenishment Do’s and Don’ts

Customer expectations and a highly competitive marketplace are compelling companies to change the way they do business. With markets showing signs of growth, companies are looking to reduce costs and be more responsive to their customers by upgrading their capabilities, creating new processes utilizing new technology. Unfortunately, many companies are going to be stuck talking about change but doing nothing. Those companies will look at the market growth and buy inventory with less accuracy in placing that inventory at the right customer touch points. Those inventories will grow this fall as seen in the past 4 years. Those ‘old school’, ‘no change’ companies will be the ones running big discounts with low margins. Some of those same companies will start to appear on the ‘who will close in 2014’ lists.

Are you ready to ‘Tighten the Links in Your Supply Chain?™’

Inventory Replenishment and Real Time Supply Chain Visibility, designed from day one for you by retailers and wholesalers.Contact us for a free review of your current Inventory Replenishment issues. We have the experience and tools to help you improve your business. Also, request a demo to learn how our software can reduce inventory costs and improve service that will increase sales. We install in 30 days at a fraction of the cost of legacy systems.

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