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Striking a Balance: Mastering Inventory Replenishment in Fashion Retail
Fashion Retail moves at a rocket’s pace, so mastering inventory replenishment is important. When supply and demand is balanced, retailers can be confident that they always have the right products on hand to meet customer needs.
As customers, all of us understand this particular scenario- imagine you stroll into your favourite clothing store.
You’re excited. You’ve got a fun event coming up and you have to look amazing. You’ve done a little research online, and found something you know will be perfect for you.
You get to the shop that’s supposed to have the piece, and it's nowhere to be found.
This problem happens with E-commerce fashion retailers too. A customer might need a pair of jeans - but the size isn’t available, so they have to go to another site.
You’re excited. You’ve got a fun event coming up and you have to look amazing. You’ve done a little research online, and found something you know will be perfect for you.
You get to the shop that’s supposed to have the piece, and it's nowhere to be found.
This problem happens with E-commerce fashion retailers too. A customer might need a pair of jeans - but the size isn’t available, so they have to go to another site.
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This frustrating customer experience is a fashion retailer’s nightmare. When customers are unhappy, they’ll go to a brand who has what they’re looking for. And they won’t look back.
Fashion retailers must walk a tightrope between supply and demand. And this is why inventory replenishment is vital to the health of a fashion retail brand. It’s a fine art that takes time to learn and resources to maintain.
But mastering this art makes businesses more efficient and appealing. It also has the potential to transform them into profit-making powerhouses, whether they’re bricks-and-mortar or e-commerce fashion retail.
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What is Inventory Replenishment?
For the customer, inventory replenishment feels like a magic trick because products simply appear on shelves or in warehouses ready for the picking. But for a retailer, good replenishment is a thorough end-to-end process.
Inventory replenishment, in the simplest terms, restocking products in a store or warehouse to maintain optimised inventory levels at all times.
When done right, it ensures that customers can access the products they want and need when they need it, while also avoiding the perils of overstocking or running out of stock.
Replenishment in fashion retail operations lays at the heart of a brand’s success. It directly impacts customer satisfaction, brand perception, and ultimately, the bottom line. It is ignored at a retailer’s peril - for instance, Nike’s share value dropped nearly half last year, with overstocking and markdowns primarily to blame.
Effective inventory replenishment ensures that both classic and trendy popular items are always available. It also reduces the risk of stockouts, and prevents costly overstock situations.
An effective inventory replenishment team must master two essential branches: forecasting demand and optimising stock levels.
For the customer, inventory replenishment feels like a magic trick because products simply appear on shelves or in warehouses ready for the picking. But for a retailer, good replenishment is a thorough end-to-end process.
Inventory replenishment, in the simplest terms, restocking products in a store or warehouse to maintain optimised inventory levels at all times.
When done right, it ensures that customers can access the products they want and need when they need it, while also avoiding the perils of overstocking or running out of stock.
Replenishment in fashion retail operations lays at the heart of a brand’s success. It directly impacts customer satisfaction, brand perception, and ultimately, the bottom line. It is ignored at a retailer’s peril - for instance, Nike’s share value dropped nearly half last year, with overstocking and markdowns primarily to blame.
Effective inventory replenishment ensures that both classic and trendy popular items are always available. It also reduces the risk of stockouts, and prevents costly overstock situations.
An effective inventory replenishment team must master two essential branches: forecasting demand and optimising stock levels.
Are you overwhelmed to forecast your demand?
Learn how to effectively forecast demand and optimise stock levels
Replenishment Teams
On the surface, inventory replenishment sounds simple. Spot low stock, order, boom - finished. But it is actually incredibly complicated and very difficult to get right. It might even be more difficult than merchandise planning because it requires more agility.
That’s where a dedicated replenishment team comes in.
The replenishment team plays a critical role, because they must handle the day-to-day operations of managing stock levels, placing replenishment orders with suppliers, constantly researching trends and competition, and analysing data to make informed decisions about inventory management.
The team is vital to the success of a retail brand because they must minimise stockout, reduce overstocking, improve cash flow as much as possible, and enhance operational efficiency so that the retail team can devote more time to marketing, customer service, and innovation.
That’s why a replenishment team must have the resources they need to give them a good foundation for retail success.
On the surface, inventory replenishment sounds simple. Spot low stock, order, boom - finished. But it is actually incredibly complicated and very difficult to get right. It might even be more difficult than merchandise planning because it requires more agility.
That’s where a dedicated replenishment team comes in.
The replenishment team plays a critical role, because they must handle the day-to-day operations of managing stock levels, placing replenishment orders with suppliers, constantly researching trends and competition, and analysing data to make informed decisions about inventory management.
The team is vital to the success of a retail brand because they must minimise stockout, reduce overstocking, improve cash flow as much as possible, and enhance operational efficiency so that the retail team can devote more time to marketing, customer service, and innovation.
That’s why a replenishment team must have the resources they need to give them a good foundation for retail success.
Forecasting Demand
In the world of fashion retail, accurate demand forecasting is the secret ingredient to a successful inventory replenishment strategy.
Fashion is heavily influenced by trends and seasonality. New styles, colours, and designs can dramatically impact customer preferences, leading to sudden (and very large) shifts in demand.
If they stand any chance of continued success and profit, retailers must be aware of these trends and incorporate them into their demand forecasting to make the most customer-centric assortment possible.
But it’s a delicate balance.
In the world of fashion retail, accurate demand forecasting is the secret ingredient to a successful inventory replenishment strategy.
Fashion is heavily influenced by trends and seasonality. New styles, colours, and designs can dramatically impact customer preferences, leading to sudden (and very large) shifts in demand.
If they stand any chance of continued success and profit, retailers must be aware of these trends and incorporate them into their demand forecasting to make the most customer-centric assortment possible.
But it’s a delicate balance.
Underestimating Demand
Underestimating demand can result in dreaded stockouts. This not only disappoints customers but can also lead to lost sales opportunities, especially with more “unexpected” trends like the influences of a popular film or music video.
Though sometimes high demand is expected, if the products don’t come close to the demand, it can be a problem. When Supreme and Louis Vuitton launched its collection in 2016, customers were unhappy about lining up for nearly 24 hours, competing against thousands of other people in each pop-up location.
Consistent stockouts can harm a retailer's brand image over the long term. Customers might begin to think of the brand as uncool or behind the times. That means no more repeat business, bad word-of-mouth, and loss of market share.
Stockout can cause potential sales loss in several ways too. Customers who can’t find what they are looking for will probably go to a competitor - so that’s an immediate sale loss. On top of that, the retailer has lost the opportunity for upselling and cross-selling on that would-be purchase.
Additionally, if the customer finds more than once that they can’t get the products they need, they are likely to switch retail brand allegiance altogether.
Stockouts can create problems in the supply chain too. Reacting too slowly and in panic to a missed trend, a retailer may try to expedite orders or make last-minute changes to meet this unexpected demand. This can lead to strained relationships with suppliers.
It also means a brand’s competitors who are better at demand forecasting will scoop up that customer share, and enjoy higher profits and brand reputation.
Of course it’s not great on the other side, either.
Underestimating demand can result in dreaded stockouts. This not only disappoints customers but can also lead to lost sales opportunities, especially with more “unexpected” trends like the influences of a popular film or music video.
Though sometimes high demand is expected, if the products don’t come close to the demand, it can be a problem. When Supreme and Louis Vuitton launched its collection in 2016, customers were unhappy about lining up for nearly 24 hours, competing against thousands of other people in each pop-up location.
Consistent stockouts can harm a retailer's brand image over the long term. Customers might begin to think of the brand as uncool or behind the times. That means no more repeat business, bad word-of-mouth, and loss of market share.
Stockout can cause potential sales loss in several ways too. Customers who can’t find what they are looking for will probably go to a competitor - so that’s an immediate sale loss. On top of that, the retailer has lost the opportunity for upselling and cross-selling on that would-be purchase.
Additionally, if the customer finds more than once that they can’t get the products they need, they are likely to switch retail brand allegiance altogether.
Stockouts can create problems in the supply chain too. Reacting too slowly and in panic to a missed trend, a retailer may try to expedite orders or make last-minute changes to meet this unexpected demand. This can lead to strained relationships with suppliers.
It also means a brand’s competitors who are better at demand forecasting will scoop up that customer share, and enjoy higher profits and brand reputation.
Of course it’s not great on the other side, either.
Overestimating demand
Overestimating demand could lead to overstocking, tying up valuable resources in unsold merchandise. Capital is tied up, which restricts valuable cash flow and a fashion retailer will find it hard to invest in necessary areas like marketing and new lines.
Storage costs can be extortionate, which means higher warehouse rental and electricity bills and potentially more staffing. Insuring excess inventory can increase your insurance premiums. And logistics expenses, such as shipping and handling, can climb because more items need to be moved and stored.
Overestimating demand could lead to overstocking, tying up valuable resources in unsold merchandise. Capital is tied up, which restricts valuable cash flow and a fashion retailer will find it hard to invest in necessary areas like marketing and new lines.
Storage costs can be extortionate, which means higher warehouse rental and electricity bills and potentially more staffing. Insuring excess inventory can increase your insurance premiums. And logistics expenses, such as shipping and handling, can climb because more items need to be moved and stored.
Moreover, a retailer runs the risk of inefficient and cluttered warehouse space, which can result in processing errors, misplaced inventory, and reduced efficiency, further increasing logistics costs.
And then there’s the costs of the markdowns themselves - heavy discounts mean low or no profit margins. The value of the overstocked items depletes as time goes on because they become obsolete, which makes it even more difficult to offload.
And if the brand gets a reputation for overstocking, issues like environmental waste and brand dilution will have a significant long-term impact. Burberry may have destroyed $38 million in extra stock to “protect the brand”, but it backfired on them when word hit the press.
Even the big, reliable giants can get forecasting demand wrong. In 2018, H&M were in crisis because of bad forecasting. They were stuck with $4.3 billion in unsold stock leading to a drop in operating profit of 62% and dropping the value of their shares.
There is so much at stake, which is why striking the right balance in forecasting demand is crucial to keep both happy customers and strong profit margins.
And then there’s the costs of the markdowns themselves - heavy discounts mean low or no profit margins. The value of the overstocked items depletes as time goes on because they become obsolete, which makes it even more difficult to offload.
And if the brand gets a reputation for overstocking, issues like environmental waste and brand dilution will have a significant long-term impact. Burberry may have destroyed $38 million in extra stock to “protect the brand”, but it backfired on them when word hit the press.
Even the big, reliable giants can get forecasting demand wrong. In 2018, H&M were in crisis because of bad forecasting. They were stuck with $4.3 billion in unsold stock leading to a drop in operating profit of 62% and dropping the value of their shares.
There is so much at stake, which is why striking the right balance in forecasting demand is crucial to keep both happy customers and strong profit margins.
Empowering Inventory Replenishment
- Historical Sales Data AnalysisDelving into past sales data (particularly related to seasonal patterns), helps retailers identify patterns and trends, making it easier to predict future sales and make informed decisions about inventory replenishment.
- Market ResearchThis gives retailers valuable insights into customer preferences, competitor performance, and industry trends. Because the information is straight from the horse’s mouth, a retailer can fine-tune demand forecasting and be more confident of its potential outcome.
- Sometimes human error can’t be avoided. Humans are imperfect after all! But advanced algorithms, AI and machine learning can analyse vast amounts of data, including historical sales, customer demographics, and market trends, to automatically generate accurate demand forecasts. This avoids human error (and saves time and resources). So it’s important to be AI-ready to stay competitive.
3 Factors for Determining Optimal Stock Levels
Sell-through Rate
How fast do products sell? Faster-selling items generally need more frequent replenishment, while slower-moving items might need a more cautious approach. However, it’s important to note that even reliable faster-selling items need support from sales and marketing to keep the stock moving.
Lead Times
How long does it take for suppliers to deliver new stock? Longer lead times require larger buffer stocks, while shorter lead times can allow for leaner inventory levels. Retailers must understand that lead times are subject to change. The last few years have shown that the supply chain can be disrupted by a variety of factors, so it’s worth keeping the chain reliability in mind.
Product Life Cycles
How long will a product be popular or in-season? Items with shorter life cycles, like fast-fashion and trend-bound pieces might need more agile replenishment strategies. But timeless classics have longer cycles, and don’t need as much time and intensity.
Struggling with Inventory Replenishment?
Discover how to maximise your efficiency and increase your profits with effective inventory replenishment strategies
Inventory Replenishment Strategies
Replenishing inventory is incredibly complex and a replenishment team has to make hundreds if not thousands of decisions that tick over, 24-7.
And both bricks-and-mortar and E-commerce retailers have to keep in mind the additional needs of individual locations and the geographical requirements that brings. Each store or area may have different sales patterns, customer preferences, and inventory requirements, demanding further customisation.
At the heart of inventory replenishment is a good replenishment plan, which needs to be as holistic as possible and act as a unified system. It needs to take into account demand forecasting, determining optimal stock levels, setting reorder points, and choosing the right replenishment techniques. The replenishment plan will always use at least one replenishment strategy.
Replenishing inventory is incredibly complex and a replenishment team has to make hundreds if not thousands of decisions that tick over, 24-7.
And both bricks-and-mortar and E-commerce retailers have to keep in mind the additional needs of individual locations and the geographical requirements that brings. Each store or area may have different sales patterns, customer preferences, and inventory requirements, demanding further customisation.
At the heart of inventory replenishment is a good replenishment plan, which needs to be as holistic as possible and act as a unified system. It needs to take into account demand forecasting, determining optimal stock levels, setting reorder points, and choosing the right replenishment techniques. The replenishment plan will always use at least one replenishment strategy.
4 Popular Replenishment Strategies and Their Risks in Robust Plan
Just-In-Time (JIT) Replenishment
This strategy minimises inventory levels by replenishing stock only when it's needed. This reduces the risk of overstocking and freeing up capital, but runs the risk of understocking and stocking too late.
Economic Order Quantity (EOQ) Model
This model prioritises and calculates the optimal order quantity that minimises total inventory costs, including ordering and holding costs. So it goes for whatever is the cheapest option. This strategy relies on fast replenishment, which might not be realistic.
Periodic Review System
This involves reviewing inventory levels at set times, checking to see where they stand against predetermined target levels, and reacting to inventory levels at those times. It’s not as accurate as a continuous system, and might not be suitable for a retailer that sells a large percentage of trendy pieces.
Continuous Review System
This is the more agile system, where inventory levels are monitored continuously, and replenishment orders are placed whenever stock falls below a specific reorder point. This is a more expensive way of doing things.
Managing Replenishment Orders
Accurate and timely replenishment orders are key because they ensure that stores and warehouses maintain optimal inventory levels to meet customer demand, but still save as much money as possible.
Accurate and timely replenishment orders are key because they ensure that stores and warehouses maintain optimal inventory levels to meet customer demand, but still save as much money as possible.
The replenishment order process typically involves the following steps:
1
Data-Driven Analysis
Analysing inventory levels and sales data to determine which products need to be restocked and when they need it.
2
Optimising Order Quantity
Calculating the optimal order quantity to balance customer demand, supply chain readiness, and inventory costs.
3
Efficient Order Placement
Placing orders with suppliers, negotiating the pricing and buy-back conditions when possible, and confirming delivery dates.
4
Enhanced Order Tracking and Coordination
Tracking the progress of orders, continually coordinating with marketing, sales and logistics, and updating inventory management systems accordingly.
5
Efficient inventory management
Receiving and processing inventory upon arrival, ensuring accurate stock counts and efficient storage. Updating sales and marketing teams to help move the new stock.
Given all that is involved in managing replenishment orders, using an analogue method and expecting excellent results is a big ask.
It’s virtually impossible for a lean-and-mean replenishment team to keep up with all the processes that are needed for optimised replenishment. That’s why as time goes on technology plays an increasingly vital role in the replenishment order process.
Inventory management software and AI-driven tools can automate order management, such as demand forecasting, order quantity calculation, and tracking.
By leveraging technology, retailers can minimise human error, save time, and make data-driven decisions that result in more effective inventory replenishment.
Key Performance Indicators for Replenishment Success
Retailers have to keep a close eye on the success of their replenishment processes. The right kind of data can help them identify trends, find and target inefficiencies, and identify opportunities for improvement.
This data is found in the Key Performance Indicators (KPIs). KPIs are essential metrics and here are some of the most common to consider:
Inventory Turnover Ratio
Measures how many times a retailer's inventory is sold and replaced in a specific time period. The higher the ratio, the better the replenishment strategy.
Stockout Rate
This measures the percentage of times a customer cannot find a desired item in stock. The lower the stockout rate, the better the retailer is doing and the fewer lost sales opportunities.
This is the percentage of inventory sold during a specific period compared to the amount available. If there’s a high sell-through rate, that means there’s a good match between inventory and customer demand.
This is the profit generated for every dollar invested in inventory. A retailer wants its GMROI to be as high as possible.
Days of Supply
This calculates how many days it would take for the retailer to run out of the current inventory. The lower the number, the more efficient the inventory management and replenishment.
This is the time between placing a replenishment order and getting the goods. Shorter lead times point to a more agile supply chain which is great for demand fluctuation.
Order Accuracy
This measures how correct the replenishment orders are. The more accurate, the better- though if inaccurate, it might be a problem with a supplier that needs to be replaced, and not necessarily the replenishment team.
These KPIs will give the replenishment teams of both bricks-and-mortar and E-commerce fashion retailers insight. And the best insight is exactly what’s needed to evaluate the success of their inventory replenishment strategies, identify areas for improvement, and ensure that their replenishment teams contribute effectively to overall retail success.
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