How Replenishment Systems Create Lost Sales
There is a replenishment model throughout the industry that gets defended by bright, well-intentioned Supply Chain executives. It goes like this:
Start with a one-size fits all approach on new items where stores are allocated an equal amount of New Product X. Or, if the retailer is slightly more mature, clusters of stores receive the same amount of New Product X based on their overall sales volume. Then as New Product X sells down to its reorder level, a new order is generated and automatically sent from the warehouse to the store. In theory, this method meets the needs of keeping all stores in stock on New Product X by ensuring that store inventory is meeting store sales rates. This method is often defended as a good practice on hard-to-forecast items like fashion, footwear, media and toys.
Of course, the gotcha in that sentence was “In theory.”
Here are 5 ways that could go wrong. (and BTW, there are at least 15 other ways.)
- New Product X’s sales rate has high variability. Product X does not sell in reliable patterns. Think of umbrellas, charcoal briquettes and snow shovels. These items may sell nearly 0 for days on end and then suddenly sell dozens in a compressed time period. Separating the noise from the signal is difficult for all but very sophisticated replenishment models. There are two situations this will create: Either safety stock will be set so high for those items that store inventory will swell creating shelves full of non-working inventory OR the replenishment model will never catch up to the actual demand and out of stocks will plague the stores during the highest opportunities for sales.
- Product is missing. Maybe the product is in the backroom. Maybe it has been stolen. Maybe returned goods are not saleable but are in the system as available for sale. Maybe it is hanging in a fitting room or misplaced in the store by a customer who changed his mind. In any case, the system will assume your store is in fine position and not fill the hole left in the actual merchandising space. There are several ways to combat this, from creating a store-initiated “holes” program to scan shelf outs to a disciplined inventory cycle count process.
- The product has a high propensity for visual out of stocks. Perhaps the product is on the top or the bottom shelf. In both of those cases, once the first several products of a facing have been sold, they can appear out of stock to the shopper walking the aisle. Missed sales occur regularly because shelf stockers do not face up the product on a routine basis and the replenishment system believes that shoppers are choosing to not purchase the product.
- The product is regularly merchandised away from its home location. Your replenishment model assumes that it is in its home location and that there is sufficient stock to fill that position. In fact, the stock is in another location and your home location is barren. Sales decline as customers, store associates and the replenishment model struggle to find the product in the store
- Minimum reorder levels are not aligned to purchase patterns. Let’s assume the initial allocation was correctly set at 24 pieces. The reorder level was set to 6 pieces. Once 18 pieces are purchased, the replenishment system will send 18 more. However, if this is an item like wallpaper, yarn, laminate flooring or shingles, where customers purchase large amounts in matched lots (for color congruency, say) and a typical purchase is 15 units, then your replenishment system will not recognize when the product has become “virtually out of stock.” The original 24 was shopped once. 15 units were purchased. 9 units now sit on the shelf, which is too high to trigger a re-order and too low to meet the needs of the next shopper.
The next time your supply chain teams tells you that its system automatically adjusts replenishment to accommodate store sales, think about these 5 situations. There are clever solutions to accommodate these and the 15 other ways replenishment systems can create lost sales. Delaney Consulting is always ready to help.