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The retailer's guide to inventory replenishment
Order fulfilment

The retailer's guide to inventory replenishment

Versha Kamwal
May 2, 2021
mins read

Inventory management is a vital part of ecommerce that impacts the overall brand experience and defines customer loyalty. Managing inventory involves maintaining optimal inventory levels, so all products featured on your online store are in stock and ready to ship to the customers. For that, it is important to restock your inventory, especially your fast-selling products, to ensure uninterrupted order fulfilment.

Furthermore, when you are selling on marketplaces, they encourage you to follow a recommended schedule to avoid running low on products or going out of stock.

In this blog, we will focus on one aspect of inventory management— inventory replenishment, why it is important for ecommerce merchants, and the methods and best practices to improve the replenishment process.

What is inventory replenishment?

Inventory replenishment, also known as stock replenishment, is the process of restocking inventory in the warehouse or fulfilment centre to maintain optimum inventory levels. It can include— sourcing inventory from suppliers or manufacturers or moving inventory from reserve storage to storage shelves (primary storage) in case of unexpected spikes in demand.

As soon as orders come in, an efficient inventory replenishment process will help you ensure there is sufficient inventory is ready to be picked, packed, and shipped to fulfil the customer's order.

34% of ecommerce businesses ship orders late due to items being out of stock at the time of purchase.

Thus, inventory replenishment is one of the most crucial operations for your ecommerce business as it highly impacts customer satisfaction. Let's look at more reasons why.

Why inventory replenishment is important for ecommerce retailers?

Inventory replenishment directly affects your brand's ability to meet customer demand, fulfil orders on time, and turn them into profit. Here are the reasons why efficient inventory replenishment is important:

1. Prevents stockout

If you fail to replenish inventory at the right time, you may have to bear the risk of a stockout, i.e. products being out of stock at the time of purchase. This can cause major frustration for your customers and result in a loss of sale for you. In the meantime, while your products are stock out, your customers can also turn to your competitor. To avoid such scenarios, it's best to maintain accurate inventory levels in your fulfilment warehouse and ensure timely inventory replenishment.

2. Avoids overstocking

If you replenish your inventory too early or don't consider factors like changes in customer demand or seasonality, it can result in slow-moving inventory. Ultimately, it can also increase your inventory holding costs. Moreover, if slow-moving inventory sits in storage for too long, it can become unsellable—for instance, food and beverages or cosmetics as they come with expiration dates. Thus, apart from not having enough inventory, overstocking can also impact your bottom line by shooting up storage costs. But with a smart inventory replenishment process, you can avoid overstocking.

Overstocking and under stocking
Maintaining accurate inventory levels

3. Reduces shipping costs

Suppose a customer orders multiple products from you at the same time. One of the products is out of stock at the warehouse closest to the customer location but is available at a different location. In such a scenario, you need to send a split shipment, i.e. send multiple products of one order in separate packages from a different location or at a different time. This will increases shipping costs, packaging cost and also confuse the customer.

By forecasting demand and analysing your historical data, you can split your inventory across multiple fulfilment centres and plan accurate inventory replenishment. This will enable you to reduce your shipping costs, packaging costs, and reduce order transit times.

What are the methods of inventory replenishment?

  1. Reorder point method

In this method, you keep a minimum amount of inventory in stock at all times, and when inventory levels deplete, you restock your inventory. It helps you to ensure that you have enough stock on hand for order processing.

For instance, you have 1,000 products in your warehouse. You may set your reorder point when 200 products are left in your inventory. Then you can reorder your inventory.

To know how much reorder quantity you need and when, you have to calculate the reorder point using the following formula based on historical order data. Moreover, all products have different reorder points. This means you have to calculate reorder points for every product individually.

Reorder point formula
Reorder point formula

2. Periodic method

In the periodic inventory replenishment method, inventory levels are restocked at specific intervals. This means inventory levels are only assessed at particular times, even if stock levels drop before the set date. This method is usually used in warehouses with massive storage capacity.

For instance, you assess inventory levels every three months for replenishment. If the inventory levels drop, you restock. And if inventory levels are fine, then you don't have to reorder. Although, if your inventory runs out before that date, you don't have to reorder until the cycle ends.

3. Top-off method

In the top-off replenishment method, also known as lean time replenishment, inventory levels are restocked frequently in smaller batches, rather than waiting for a product to reach its minimum threshold. It is generally used to maximise utility during downtimes and maintain a high inventory turnover ratio without encountering stockouts.

The top-off method tends to be the most suitable inventory replenishment strategy in two situations— when your inventory includes many fast-moving products and promotional events and campaigns like flash sales.

4. On-demand method

In this method, you restock and reorder your inventory when you need to fulfil orders. Thus, on-demand replenishment is based on customer demand. It requires careful planning to ensure you are prepared for future demand fluctuations. You can do it by maintaining a safety stock to minimise the risk of stockout if there’s a sudden spike in orders.

Best practices of inventory replenishment

To ensure that you are always able to replenish its inventory as needed, you can follow these best practices:

1. Implement the right technology

Having the right ecommerce technology in place can help you optimise your ecommerce fulfilment process. By investing in a powerful inventory management system (IMS), you can automate crucial processes like inventory replenishment and get more visibility into inventory levels across multiple sales channels and multiple locations in real-time. With advanced reporting, an IMS will enable you to access your historical data, such as average sales per day, sales by product, sell-through rate, and more, to know when to replenish your inventory. Thus, a powerful IMS can help you make better inventory replenishment decisions, stay on top of inventory control, track inventory trends, avoid stockouts and overstocking.

2. Utilise real-time inventory replenishment data

With automation, you'll have access to real-time inventory and data, giving you insights into which products are slow-moving and fast-moving. This will enable you to make better decisions on when it's time to replenish inventory. Moreover, this data will help you improve demand forecasting, calculate safety stock quantities, and identify inventory turnover ratio. Additionally, it would be best if you considered the average time it takes to ship stock to a fulfilment centre.

For instance, you sell about 100 units of a product in a week, and it takes two weeks to ship your inventory to the fulfilment centre. It would be advisable to start the replenishment process when your inventory for that product reaches 300 units. This will give you three weeks to place an order with your vendors and send the shipment to the fulfilment centre before your inventory is depleted.

3. Monitor and adjust your replenishment approach

To track your inventory more efficiently, you should conduct regular inventory audits. It will enable you to know if there's any difference between the actual inventory in the fulfilment centre and the recorded inventory levels in your system. Additionally, you can set standard warehouse receiving procedures to ensure inventory is received at your warehouse from suppliers or manufacturers on time. Moreover, you can monitor your inventory holding costs, including storage, staffing, and depreciation costs, to ensure that there are no major cuts to your profit margins. This will help you detect any leakages in the inventory replenishment process to take corrective measures.

Bottom line

Inventory replenishment is often the most ignored part of the order fulfilment process but is an essential process that requires a lot of focus if you wish to enhance your customer experience and succeed in your business. At first, optimising inventory levels might seem like a challenging task, but with the right approach, the right partner, and the right technology, you can simplify the entire process and never miss an opportunity to delight your customers and build a strong reputation for your brand.

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