Stock Replenishment (Supply Chain)

By Joannès Vermorel, last revised January 2012

In supply chain, the stock replenishment is an operation that consists in ordering more stocks in order to fulfill the customer demand. Replenishment is typically initiated either by an inventory policy such as the Min/Max inventory method or by a backorder triggered by a client order that could not be fulfilled by the stock on hand.

Replenishment rules

In order to increase productivity, most ERP and inventory management systems implement replenishment rules to automate operations to some extent. Replenishment is typically triggered when the inventory level hits the reorder point (also called reorder trigger level), a setting from the system.

When the reorder point is hit, an order matching the economic order quantity (EOQ) is produced. Again, ERPs typically provide some support for the calculation of the EOQ.

In the Min-Max inventory model, the Min value represents the reorder point, while the Max represents the targeted quantity. Reorder quantity is Max minus Min (i.e. the difference between Min and Max).

The complexity of replenishment operations greatly depends on the position of the ordering agent within the supply chain.

For stores part of a retail network that relies on centralized warehouses, replenishment are typically numerous, simple and largely automated. Indeed, at the store level - grocery stores being the archetype here - there are typically a rather large numbers of small orders to be passed on a daily basis. Hence, store managers cannot afford a system either too complex or too demanding in term of manpower.

For warehouses, replenishment’s from producers are typically larger and of longer order cycle (the week rather than the day). Then, the order itself is typically more complex because lead time can vary a lot (from next day delivery for local producers to several months for overseas manufacturers) and because other factors such as volume discounts impact the economic order quantity.

Lokad’s gotcha

We are routinely encountering companies that seemingly don’t do any demand planning. Yet, frequently in those situations, forecasts are implicitly defined through replenishment rules. Indeed, defining a reorder point is roughly equivalent to producing a demand forecast: from the report point, it’s possible - to some extent - to compute the underlying implicit demand forecast. We believe that it’s best practice to explicitly isolate, within the replenishment rules, where demand forecasts come into play.