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The Benefits of Optimizing your Store Replenishment Process

Mar 21, 2018 6 min

In retail operational terms, store replenishment is often the poor cousin, overshadowed by higher-profile activities such as buying, merchandising and marketing. And yet the efficiency of a business’s store replenishment operation has a major impact on profitability. The accuracy and effectiveness of store ordering affect sales through shelf availability. It also has an impact on handling, storage, and wastage costs in stores and in other parts of the supply chain. Given that even small retail outlets often have thousands of items, while larger hypermarkets have tens of thousands, it’s increasingly obvious to most retail executives that accurate, item-level control is virtually impossible to achieve with manual store ordering. When RELEX set out to change the way retailers ordered and managed replenishment back in 2005 few companies automated their ordering. Over the last decade and more, automated and system-assisted replenishment has become the default simply because the results are so dramatic.

The good news is that many of the gains to be had from optimizing the store replenishment process are significant, often amounting to savings of several percents of total turnover. Many of those gains can be realized relatively quickly and easily. That means optimizing demand forecasting, inventory management and the setting of order cycles and order quantities by making them more systematic, more accurate, and increasing the level of automation in routine areas of store replenishment so your team can focus its expertise on areas that requite closer attention.

And while executives often talk about making their company’s supply chain more efficient through initiatives such as closer collaboration between companies, or extending the use of the technology of the moment, such as blockchain, it’s important not to forget that the most reliable route to greater profitability, as we’ve demonstrated time and again, is often that of simply getting the basics right.

The key point is this: improving your own replenishment system gets results fast – often much faster than wide-ranging development projects involving multiple parties or new technology!

Optimized Store Replenishment Isn’t Just a ‘Nice to Have’

The more SKUs a company had to handle, the bigger the return from getting the store replenishment process right. Typically, if a company carries a couple of thousand products or more, the benefits become really significant. Moreover, if there are several warehouses or stores to manage, the gains multiply. We’ve found that almost every company sees a return within months from optimizing their store replenishment processes. Whether you handle groceries, building materials, toys, books, car parts, garden products or gifts, the same principles apply.

The companies that typically benefit most from getting an automated product replenishment system tailored to their business needs are generally those where:

  • Significant capital that could be better used elsewhere is tied up in excess inventory
  • On shelf availability levels are unacceptably low (or aren’t measured) resulting in lost sales and lost customers
  • The total cost of product replenishment is high and needs to be lower.
  • Replenishment ordering or buying is decentralized, often being left to local managers.

For companies that have to manage a large number of SKU’s, one of the most effective ways of making store replenishment more accurate, efficient and cost effective is to use a replenishment system tailored specifically to the business’s operations. When thousands, or even millions, of different products need to be managed, manual ordering is inevitably highly labor intensive and costly and, as we’ve said, it’s simply impracticable for the huge quantities of data to be analyzed effectively when done manually, resulting in errors and increased costs.

An efficient replenishment system offers three broad benefits:

  1. Reduced process costs.
  2. Lower stock levels and improved inventory turnover.
  3. Higher service levels.

An automated replenishment system never stops working. It constantly monitors stock, sales and demand. Human errors, such as forgetting to place an order, are eliminated. A good replenishment system also factors in forecast changes in demand and adjusts the replenishment orders. It increases service levels, leads to increased sales and improves customer satisfaction.

A well calibrated store replenishment system classifies products individually and assigns different attributes to them. This allows service level targets to be set higher for the products that customers consider most important and purchase most frequently. Using a system that recognizes sales frequency, profit margin, or sales value allows a company to manage its inventory in a way that best ensures long term profitability.

Inventory turnover is also improved; the replenishment system is able to manage safety stocks more accurately than any human buyer. If inventory management is done manually, it is impossible to evaluate the safety stock requirements of each SKU accurately. Instead, the items need to be managed as groups, using basic rules of thumb. Consequently, if the overall service level needs to be increased, the inventory buffer is typically enlarged for a wide range of items, many of which will be overstocked as a result. A competent store replenishment system, on the other hand, will be able to calculate the safety stock level for each SKU separately and set them to meet service level targets as efficiently as possible, taking into account the predictability of demand, delivery lead time, and delivery accuracy of each item. The greater degree of accuracy in inventory management offered by a good replenishment system makes it possible to increase service levels and inventory turnover, simultaneously.

That’s not all. A good replenishment system will make the replenishment process more cost effective. Automating stock level monitoring and routine replenishment orders save a huge amount of management time. That time can be redeployed to more challenging tasks such as assortment planning, supplier negotiations, sales support, exception management and staff development.

Exception management can also be made more effective through system support. A good replenishment system is able to anticipate product shortages, late deliveries, seasonal products where there’s a risk of excess stock and other exceptions faster than any human. The system can, in many cases, respond to the exceptions automatically, and in others flag them to managers for expert attention.

Picking the Right Technology

Every company is different. Supply chains, cost structures, management style – companies are like people, they all have their unique personalities. Replenishment systems need to fit round the company rather than require that the company fits around the system. They must be capable of being customized to support the specific features of each supply chain – and the systems supplier must understand the customer’s business in all its complexity.

However, to ensure quick and meaningful results, an efficient replenishment system must also include certain essential features:

  • The system must support automatic demand forecasting at the SKU level and be able to take into account periodic or seasonal variations as well as trends and changes in demand automatically.
  • The system must be able to calculate efficient safety stock levels at the SKU level, taking into account the predictability of demand, delivery lead times, and delivery accuracy.
  • Cost-based optimization of order quantities and order cycles at the supplier or product level saves money.
  • Combining automated routine orders with order suggestions for specific important items, as well as automatic exception management, makes the product replenishment process more efficient and reduces the resources needed to operate it.

Making Optimized Store Replenishment a Reality

Just to recap the key points. Optimizing your store replenishment operations means:

  • More efficient product replenishment = more profit.
  • Improving store replenishment is one of the fastest ways to make your supply chain more efficient.
  • This isn’t rocket science: A good replenishment system is able to evaluate your replenishment needs faster, more accurately and more cost-effectively than even a fine-tuned purchasing team. Computers track data better than people – people solve many complex problems better than computers, especially anything with a human dimension. Liberate your managers from the drudge of data crunching so they can really use their expertise, support your staff in their work and to make your customers love you.

Store replenishment is definitely an area where many food retailers’ operations are quite far from best practice. To adress this, and several other areas in grocery retail, we’ve combined a best practice guide: Best Practices for Managing Grocery Retail Supply Chains. You will be hard pressed to find a single retailer employing all of these best practices. Rather, we encourage you to prioritize the most feasible and impactful development areas from your own perspective.

Written by

Mikko Kärkkäinen

Mikko Kärkkäinen

Co-founder & Group Chief Executive Officer