How to Prevent Stockouts with Proper Stock Replenishment
Ambitious manufacturers know that stock replenishment is one of the areas which can make a huge difference to the growth of their business. One of the reasons for that is that it can just be so time-consuming to manage correctly. Thankfully, there is a way….
Getting up to walk to the coffee machine for a refill.
Sometimes it’s a welcome relief from the screen, and other times it’s just a drag.
Especially when you sit down, get back to work, and then forget about the coffee until it’s gone cold.
First world problems, eh? But wouldn’t it be great if the coffee was always filled to the brim and just warm enough to slide down your throat effortlessly.
Well it’s a dream most modern manufacturers have with their coffee as much as they do with their stock replenishment.
Knowing that their stock room is always in the process of being refreshed and filled to the brim for perfect flow of consumption.
But what does stock replenishment mean?
Stock replenishment is the process of reordering materials to meet demand for your manufacturing and sales orders.
That means making sure that you never run out of stock and are able to deliver to your customers on time.
Now, as with most things in life there’s a good way of doing inventory replenishment, and there’s a bad way. Just as there’s bitter coffee available as much as there is that lush high-end Hawaiin stuff.
And to make sure that you’re managing your stock replenishment properly requires you to start taking your inventory management seriously.
Otherwise you’re going to come up against stockouts and miserable customers, or you’re going to either end up ordering too much stock and increasing your carrying costs.
Consensus amongst experts is that the costs of having extra inventory are between 18 - 35% of an item's value for a year - a staggering number to consider.
That’s why we’ve come up with this mini guide to make sure you stay on the right path to replenishing stock success.
What is Stock Replenishment?
Modern manufacturers like Stella Soomlais have been battling stock replenishment with spreadsheets for a long time. Thankfully, the dawn of Smart Manufacturing Software has automated inventory management enough to allow manufacturers to give up the ancient Excel ways and focus on their products and customers instead.
It’s easy enough to say that stock replenishment is the process of ordering stock to meet demand. But to really gain an understanding we have to step back and see what that means in terms of the supply chain.
Because ultimately, your ability to keep stock at optimal levels is not totally dependent on your own capabilities. Your suppliers are as paramount to the process as your own principles.
So yes, stock replenishment is about holding an amount of stock which doesn’t drastically increase your carrying costs, whilst also making sure you never have stockouts.
You need to build yourself a landscape which covers all of these bases so that your inventory replenishment process becomes part of the natural order of your modern manufacturing business.
Now thankfully, you won’t be on your own with all this. There is production management software out there which can automate this for you.
It makes sure that you know exactly when to purchase more materials, whilst also ensuring you have materials available for your current manufacturing and sales orders.
But before we get to that, let’s see how we can build the foundations of inventory replenishment right off the bat.
Avoiding Stockouts with Stock Replenishment
So we know that there are plenty of angles we can take when tackling stock replenishment. Which is why we have decided to break it down into the main building blocks.
These are not necessarily in order of importance, but here is what it boils down to:
Covering all of these bases is going to give you a complete outline of when you need to replenish stock.
Right then, let’s go through them in more detail….
1. Setting Safety Stock
Stockouts are not always the most predictable of crisis's to happen to your manufacturing business.
They can occur due to fluctuating manufacturing lead times, as a result of supplier changes, or even just a sudden spike in customer demand.
You can of course try to plan to avoid these situations, but there are some moments which are just simply out of your control.
That’s why it’s always important to have a level of safety stock for your materials and finished products. Safety stock is the quantity of a particular item which is always there in the background to avoid dreaded stockouts.
It’s an emergency fund of inventory which guarantees your customers will always be able to get their products on time.
This is the basic formula you can apply to get your safety stock numbers.
Safety Stock = (Maximum Daily Usage x Maximum Lead Time Days) - (Average Daily Usage x Average Lead Time Days)
Now it’s just a matter of making sure it’s always implemented.
2. Setting Reorder Points
So, when do you want to be triggering your replenishment orders?
Well, that’s where a lovely little helping of reorder points come in.
A reorder point is a threshold for each of your inventory items which you do not want to go below, just above your safety stock.
The difference between reorder points and safety stock is that your reorder point is designed to make sure you don’t have to dip into that emergency fund of safety stock more than you have to.
You can think of reorder points as your reliable army standing outside the doors of your castle, while the safety stock is your final line of defence.
Anyhow, reorder point is a metric which will tell you two things.
When to order more materials from your supplier;
When to manufacture more products from your current raw material inventory.
To get this number in the palm of your hand you’re going to want to apply the following formula for each of your items:
Reorder Point = (Average Daily Usage x Average Lead Time in Days) + Safety Stock
Once you have these worked out you know that you should replenish stock every time quantities hit this level.
3. Supplier Relations
Now there’s plenty you can do to ensure safety stock is never reached. But not everything is in your control when it comes to replenishment.
Suppliers are the ones who deliver your materials, and not all were created equal. You want to be working with reliable suppliers with whom you can build a trusted relationship.
Because the last approach you want to take is a reactive one, in which changes are made only when something goes wrong.
Instead you want to work with your suppliers to make sure they understand your workflow, and how the materials you purchase from them fit into production. Not only then can they offer alternatives in times of need, but also give advice on improving the materials you currently use.
4. Demand Planning
On some level, your stock replenishment implies a certain level of demand planning.
There’s no point in setting safety stock and reorder point levels unless you also understand the context of your particular industry.
You want to be looking into seasonal spikes in demand in advance so that you can adjust your stock levels accordingly.
Even a simple search on Google Trends for your products keywords will give an indication as to where demand may be moving throughout the year.
5. Production Planning
It’s just as important to be aware of your production line when it comes to stock replenishment as it does to your material purchasing.
Because knowing which materials are currently being used in manufacturing is going to let you know how much you really have in the stock room. This way you can keep an accurate and up to date record of your inventory without having to rely on constant stocktakes.
Now, you may well be tempted to use spreadsheets to track your raw materials being used in production, but the reality is that this method is incredibly inefficient.
This is definitely one of those areas an automatic inventory replenishment system such as Smart Manufacturing Software can be of great value.
Your raw materials are booked automatically to sales and manufacturing orders so that they never overlap with each other.
Automatic Stock Replenishment
Katana gives you an overview of your stock replenishment by letting you know exactly how far off the optimal levels of inventory you are for each item. The reorder points for each item can be adjusted, and you know exactly when to make purchases when you see quantities in negative red.
The beauty of stock replenishment is that you can ensure you are not spending any more than you have to on excess stock, whilst also ensuring your customers always get their products on time.
Having elements like reorder points, safety stock and good supplier relations in place allows you to know exactly when you need to be making those purchasing orders.
But the truth is also that managing your inventory efficiently is no simple feat.
Because you’re still going to have to be constantly checking your inventory to see how it matches against these metrics.
Well, that is unless you take up on Katana Smart Manufacturing Software.
Katana automates your inventory management so that you can visually see when your stock goes below reorder points, as well as letting you know how your material availability looks for your sales and manufacturing orders.
That’s because raw materials are automatically allocated to orders so that your inventory is always up to date in real time. If you don’t have enough materials for an order, then Katana will let you know when they will arrive.
And even cooler than that is the ability to prioritize orders with a simple drag and drop feature. If you have a VIP order that needs fulfilling fast for example, you move it to the top of the list and wham…your production schedule and raw material allocation is automatically updated.
The purpose here is that having your stock replenishment automated will mean that you can spend less time putting out fires, and more time growing your business.
You can then focus on the vital and often undervalued cogs of your growing manufacturing business. We’re talking sales, marketing, product development and customer experience.
But Katana is a lot more than just an inventory management tool.
Here are just some of the benefits on offer:
On-demand access to your manufacturing costs;
Finished goods and material inventory;
Use as a production scheduling software;
Manufacturing floor-level control;
Sync accounting with your QuickBooks MRP;
Plan your material purchasing efficiently;
Ditch inefficient excel spreadsheets forever; and
Keep your entire business workflow on a single dashboard.
The takeaway here is that stock replenishment is only one piece of the maddening puzzle that is modern manufacturing.
But ensuring that your inventory levels are always at their optimal is going to go a long way to giving you the time you need to focus on growing your business.
Like having your coffee constantly balmy and filled to the brim, you’ll be a lot more focused and with one less burden on your mind.