Inventory replenishment: how to prevent stockouts & overstocks

Inventory replenishment – the art of having the right product, at the right time, in the right quantity – is not a back-office concern. 

Stock replenishment is your frontline defense against lost sales and a stagnant bottom line for your eCommerce business.

In the broader retail landscape, the IHL Group projected that inventory distortion (out of stocks and overstocks) would cost retailers a staggering $1.77 trillion in lost sales and wasted resources in 2023.

Unavailable products represent missed opportunities, frustrated customers, and a direct hit to your bottom line. 

On the flip side, an overabundance of stock can be equally detrimental. It's a delicate balancing act – a tightrope between scarcity and excess.

This guide equips you with the methods and best practices to transform your stock and inventory replenishment management approach, turning a potential liability into a strategic advantage.

What is stock replenishment?

Stock replenishment is the continuous process of refilling your inventory to meet customer demand. 

Also known as inventory replenishment, it ensures you track what you have in stock, figure out what you'll need, and order the right amount at the right time.

The inventory replenishment process requires a dynamic system of:

• Monitoring: you need to keep a close eye on your current inventory levels, tracking what's selling and how fast
• Forecasting: analyzing sales trends and predicting future demand helps you anticipate your inventory needs
• Ordering: based on your monitoring and forecasting, you order additional products to maintain optimal inventory levels

Why is stock replenishment important?

In business, proactivity trumps reactivity. 

Get it right and you’ll create a virtuous cycle: happy customers, efficient operations, and a healthier bottom line. 

Ignore it; you'll play catch-up, lose sales, and erode customer trust.

By adhering to inventory replenishment best practices for your eCommerce business, you:

1. Prevent stockout

Stockouts cause a ripple effect, with lost sales and revenue being the most obvious impact. 

So, for every customer who walks away empty-handed, you lose potential profit and future business. 

In fact, according to Digital Commerce 360 and Bizrate Insights research, 39% of shoppers abandon their online orders because an item is out of stock.

2. Avoid overstocking

While empty shelves scream inefficiency, overflowing warehouses whisper a different kind of danger.

Excess inventory is capital held hostage – money that could fuel marketing, innovation, or expansion. It's the burden of storage costs, the ticking time bomb of obsolescence, and the constant threat of spoilage.

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3. Reduce shipping costs

Shipping costs can eat your profit margins, especially if you always place small, rushed orders to compensate for poor inventory management. This frequent need for expedited shipping quickly drains your cashflow.

Strategic inventory replenishment planning, however, allows you to leverage economies of scale, which benefits both your profit margins and your cashflow management. 

By consolidating orders, you can negotiate bulk discounts from suppliers and better shipping rates.

4. Increase customer satisfaction

In the end, inventory management boils down to exceeding customer expectations. 

You deliver on your promises, build trust through consistent availability, and create a seamless, enjoyable shopping experience. 

Happy customers become brand evangelists. They spread the word and fuel sustainable growth.

Inventory replenishment methods

The proper inventory replenishment methods or policies depend on your industry, business size, product characteristics, and supply chain complexity. 

Each model offers advantages and disadvantages. 

Have a look at this infographic on inventory replenishment methods below for the full overview:

So, choosing one that aligns with your specific needs and resources is essential.

⚡ Keep in mind: this list is not exhaustive, and some businesses may use hybrid approaches that combine elements of different strategies.

You may also encounter distinct names for the same inventory replenishment methods or variations in their implementation.

1. Lean time replenishment

Lean time replenishment optimizes inventory levels by timing restocking during periods of lower demand while still expecting upcoming peaks. 

This method proves valuable for businesses managing seasonal inventory or experiencing predictable fluctuations in sales.How lean time replenishment works

• Identify low-demand periods: analyze historical sales data and market trends to pinpoint periods when orders for your products dip
• Anticipate upcoming peaks: forecast future demand to determine when sales are likely to surge again, such as before holidays, seasonal changes, or major promotional events
• Time your restocking: place orders for new inventory during those identified low-demand periods so you have ample stock to meet the increase in sales without carrying excess inventory during slower periods

Purchasing inventory in bulk during the off-season requires a significant upfront capital investment and can impact cashflow. 

2. Periodic replenishment

Periodic replenishment involves ordering inventory at fixed intervals, regardless of current stock levels. For example, you might place an order with your supplier every Monday morning or on the first day of each month.

How periodic replenishment works:

• Fixed order intervals: determine the optimal stock replenishment frequency based on factors like supplier lead time and desired inventory levels
• Variable order quantities: the quantity ordered each period varies depending on current stock levels and expected demand

3. Top-off replenishment

Top-off replenishment focuses on maintaining a predetermined inventory level by ordering smaller quantities more frequently. 

Unlike periodic with its fixed schedule, top-off replenishment reacts to real-time inventory fluctuations.How top-off replenishment works

• Predetermined target level: establish an ideal inventory level for each product based on demand and safety stock requirements
• Continuous monitoring: track inventory levels in real-time using management software, barcode scanning, or other eCommerce tools
• Trigger point: when inventory dips below a pre-set trigger point (below the target level), a replenishment order is generated for the difference

4. On-demand replenishment

On-demand replenishment reacts to customer orders rather than relying on forecasts or predetermined inventory levels. 

In this inventory replenishment policy, orders stem from sales. You only order what you need when you need it.

How on-demand replenishment works:

• Customer order triggers replenishment: each customer order starts a chain reaction, triggering the replenishment of the specific items sold
• Short lead times: collaborate with suppliers who offer short lead times and are willing to hold inventory on your behalf
• Real-time inventory visibility: implement a robust inventory management system that provides real-time visibility into stock levels across all locations

How inventory replenishment worksYou've got the inventory replenishment methods down. 

How to build a stock replenishment system?

Now, let's examine the step-by-step process to build a stock replenishment system as strong as your best-selling product.

Here's an infographic showing all the steps required to build a stock replenishment system:

Let's explore the steps one by one now.

Step 1. Track inventory levels

Without accurate, real-time insights into your stock levels, every other decision you make rests on shaky ground.

Inventory tracking allows you to understand the flow of goods in and out of your business. 

You can identify trends, anticipate shortages, and make data-driven decisions to optimize your supply chain.

For small businesses with limited product lines, manual tracking might suffice. You can physically count each item and update records by hand. 

While simple, it's time-consuming, prone to human error, and doesn't scale well as your business grows.

Spreadsheets offer a step up from manual methods, providing basic inventory management capabilities.

You can create simple databases to track stock levels, incoming orders, and sales data. 

However, spreadsheets require meticulous data entry and can become unwieldy with large inventories.

Finally, inventory management software automates the tracking process, providing real-time visibility into your stock levels across multiple locations. It integrates with your point-of-sale (POS) system, updating inventory as sales occur.

The key is to choose the method that aligns with your business size, complexity, and budget. 

But regardless of your approach, prioritize accuracy and consistency in data entry.

Audit your inventory to identify and rectify discrepancies so your data remains reliable.

💡 Pro tip: implement barcode or RFID technology to streamline inventory tracking, improve accuracy, and save valuable employee time.

Step 2. Forecast customer demand

You can't control customer demand, but you can anticipate it. Demand forecasting transforms you from a reactive business to a proactive one. 

You'll make smarter decisions about inventory levels, minimize stockouts, and avoid the costly trap of overstocking.

• Your past sales data is a goldmine of insights. What patterns emerge? When do sales spike? When do they slump? Use this information to anticipate future demand, not just react to it after the fact
• Pay attention to market trends, competitor moves, and even the overall economic climate. What's capturing people's attention? How might these shifts impact orders for your products?
• A swimwear company knows July will be different from January. Use this knowledge to adjust your inventory levels and ride the waves of seasonal demand

💡 Pro tip: use free or affordable online forecasting tools, leverage industry reports and competitor analysis, and gather input from your sales team to improve forecasting accuracy.

Step 3. Set reorder points

The reorder point is the inventory level that triggers a replenishment order. 

Establishing the appropriate threshold for each product is essential to prevent stockouts while minimizing excess inventory. 

Some businesses may consider reaching this critical inventory level as the method of stock replenishment itself, simplifying their process.

‍Factors influencing reorder points:

Factor 1. Lead time

The time it takes for a supplier to deliver an order directly impacts the reorder point.

Longer lead times require higher reorder points for the time lag between order placement and inventory arrival.

Factor 2. Demand variability

Products with volatile demand patterns require higher safety stock levels (buffer inventory) to mitigate the risk of stockouts during unexpected surges.

Factor 3. Service level targets

The desired level of product availability influences the reorder point.

Higher service level targets (e.g., 99% availability) need higher reorder points to minimize the risk of stockouts.

Factor 4. Storage costs

Holding excess inventory incurs storage costs.

Businesses with limited space or high expenses may opt for lower reorder points to minimize inventory costs.

‍Calculating reorder points:

There are various formulas for calculating reorder points, but a common approach is:

Reorder Point = (Lead time demand x average daily sales) + safety stock

⚡ Example: imagine you sell coffee beans online. You sell an average of 20 bags daily, and your supplier takes five days to deliver. 

So, you decide on a safety stock of 10 bags to accommodate potential fluctuations. 

Your reorder point would be 110 bags (20 bags/day x 5 days lead time + 10 bags safety stock = 110 bags reorder point).

Once your inventory reaches 110 bags, you place a new order.

By automatically triggering orders, the reorder point strategy minimizes the risk of running out of stock on essential items.

This inventory replenishment method provides a straightforward system, reducing the need for constant manual monitoring.

‍💡 Pro tip: start with basic reorder point calculations and then fine-tune them over time based on historical sales data, seasonal trends, and supplier performance.

Step 4. Create purchase orders

Once your reorder points signal the need for replenishment and you've selected your preferred stock replenishment method, generating accurate and timely purchase orders becomes critical. 

A purchase order is a formal request to your supplier outlining the specific products, quantities, and delivery terms required to replenish your inventory. Before transmitting an order, though, meticulous review is essential. 

Product specifications, quantities, or delivery information discrepancies can disrupt the supply chain, leading to delays and financial losses.Several methods exist for order transmission to suppliers. 

Each one has strengths based on order volume, technological capabilities, and the nature of your supplier relationships:

• Electronic Data Interchange (EDI): this technology automates the exchange of order information between your inventory management system and your supplier's platform
• Supplier portals: these portals offer a central location to submit orders, track shipments, and review order history
• Direct communication: while EDI and online portals represent ideal solutions for large-scale operations, smaller businesses often use direct communication methods like phone calls or emails

No matter your chosen method, establish strong communication channels with your suppliers, address discrepancies, and foster a collaborative relationship for a smooth and efficient inventory replenishment process.

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Step 5. Receive and inspect goods

The arrival of your order isn't the finish line but the start of another stage in your inventory replenishment planning. 

Thorough inspection safeguards your investment, prevents disruptions from faulty or incorrect products, and ensures you receive exactly what you ordered.

Upon arrival of a shipment, carefully compare the physical goods to the accompanying documentation, including the purchase order, packing slip, and other relevant paperwork. Verify:

• Product identity: confirm that the delivered products match the descriptions and SKUs listed on the documentation
• Quantity accuracy: count the received items to make sure they match the ordered quantities
• Condition assessment: inspect each item for signs of damage, defects, or tampering

Found a problem? Document it. Take pictures. Notify your supplier with detailed information.

Work with your supplier, not against them. Find the solution – returns, replacements, or credits – whatever it takes.

Collaboration leads to the best outcome for everyone involved.

Step 6. Update inventory records

After you receive and inspect a delivery, update your inventory records to reflect the newly arrived goods. 

A real-time approach provides an accurate snapshot of your current inventory levels, enabling informed decision-making about ordering, sales, and promotions.

Just like we saw in the first step, the method you choose for tracking inventory records depends on the size and complexity of your business.

So, the same applies to updating them.

Smaller companies with limited inventory might opt for manual updates using spreadsheets or physical inventory logs. 

While cost-effective, this process requires meticulous attention to detail and can become cumbersome as your business grows.

Inventory management software is invaluable for organizations with massive inventories or those seeking greater efficiency and automation.

💡 Pro tip: occasional inaccuracies can arise even with the most robust systems. Regularly reconcile your inventory records with your physical inventory counts to identify and correct inconsistencies.

Step 7. Monitor and optimize

A well-defined stock replenishment process demands continuous improvement. 

Regularly reviewing and adjusting your strategy ensures you adapt to changing market conditions, customer preferences, and internal operational needs.

Here are key performance indicators (KPIs) to track:

• Inventory turnover rate: it measures how you're selling your inventory. A high turnover rate indicates strong sales and efficient inventory management
• Stockout rate: it tracks the percentage of time a product is out of stock. A high stockout rate signals a need to improve forecasting and your inventory replenishment best practices
• Lead time: it measures the time it takes for an order to arrive after it's placed. Monitoring lead time helps you adjust reorder points and safety stock levels

💡 Pro tip: schedule regular meetings with your team to review KPIs, discuss challenges, and brainstorm solutions. Embrace a culture of continuous improvement to optimize your stock replenishment process over time.

Inventory replenishment best practices

You've seen many of these inventory replenishment best practices throughout the guide. 

But let's double down on them to ensure streamlined operations, minimized costs, and happy customers.

1. Establish safety stock to buffer uncertainty

Regardless of the inventory replenishment method of your choice, don't let unexpected demand surges or supplier delays derail your business.

Safety stock ensures you can fulfill orders even when variability strikes. 

To determine the appropriate safety stock level for each product, consider the following:

• Demand volatility: products with unpredictable demand patterns need higher safety stock levels than those with consistent sales
• Lead time variability: longer or less reliable supplier lead times require larger safety stock buffers to address potential delays
• Desired service level: define the percentage of customer orders you aim to fulfill from stock. Higher service levels require more safety stock

Along with these factors, Black Friday and Cyber Monday add another layer of complexity. 

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Prepare your business for the busiest shopping season with our BFCM planning guide.

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2. Implement inventory management software

Ditch the spreadsheets and manual tracking. Inventory management software empowers you to automate tasks, enhance accuracy, and gain real-time visibility into your inventory levels. 

These powerful tools streamline everything from order placement and tracking to demand forecasting and reporting, freeing your time and resources for strategic initiatives.

3. Data analytics to drive decisions

Data fuels smart inventory optimization. Use your inventory management system and other data sources to track key metrics, identify trends, and uncover areas for improvement. 

Base your stock replenishment decisions on insights to minimize guesswork, reduce costs, and maximize efficiency.

4. Foster continuous improvements

Inventory optimization is not a one-time project; it's a continuous journey of refinement. 

Regularly review your processes, seek feedback from your team, and remain open to implementing changes based on data and experience. 

Embrace a culture of continuous improvement to maintain a competitive edge.

5. Assign clear roles and responsibilities to ensure accountability

Define roles and responsibilities for all aspects of inventory management. 

Everyone must understand their role, from demand forecasting and order placement to receiving, storage, and fulfillment.

Clear ownership fosters accountability and promotes a cohesive approach to inventory optimization.

Smart inventory replenishment for a thriving business

As you've seen, walking the tightrope between too much and not enough inventory is a high-stakes game. 

It's not just about dodging a trillion-dollar bullet but also unleashing the true potential of your business.

By implementing the right stock replenishment strategies – from choosing the optimal method to leveraging data and embracing continuous improvement – you transform a potential liability into a powerful growth driver. 

Free up cashflow, delight your customers, and confidently scale your business.

But what if you could move even faster? What if capital wasn't a barrier but fuel for the fire? 

Enter Stenn.

Do you need to stock up but the cashflow is tight? 

Upload your invoices, get funded, and fulfill that order – that's invoice financing. 

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‍Unlock funding today – your future is calling.