The Minimum Stock Level (MSL) formula is a global model, used by retailers of all sizes, to manage inventory. And it’s completely unfit for purpose. In reality, it always has been. The main problem with MSL is that it assumes a uniformity to weekly and monthly sales which doesn’t exist in the real world. The same product never sells at the same run rate every week. It never has and it never will, and that’s why MSL is worse than redundant, it is financially damaging your business. Let’s look at why.
A self-perpetuating sales blocker
In any given month, your weekly sales for each product SKU will vary. The only scenario where a retailer sells the same volume of a specific product, every single week, is in their own imagination. The reality is that sales by product line are varied week to week and this combined with the MSL fixed supply chain means that you are either over or under-invested in product SKUs each week.
A typical graph of per-product weekly sales.
For the weeks when your supply is greater than demand on certain product SKUs, you will complete sales to all interested customers, but you will be left with overstocks (excess inventory). Holding excess inventory is wasting your finite capital investment which could be deployed on other products that could be generating sales and profit for your business. Prolonged excess inventory also leads to unnecessary clearance sales and reduced margins. To be successful, you need to maximise your capital investment in the stock that customers are buying week to week. If not, your hard-earned capital will simply rot away, caught up in unsold inventory. Understocks is the other MSL scenario where the impact is more obvious; customer demand exceeds supply and your customers can’t get the product(s) they want which equals lost sales, reduced profits and a poor customer experience.
Meeting your customers’ expectations
Today’s shoppers are unforgiving, and the retail landscape is cut-throat. If you don’t have the right stock in the right store at the right time, you’re in trouble: consumers will find another retailer who can. And if you can’t get your buying strategy to within 10% of the demand curve, you’re in even more trouble. Instant access to desired products is the minimum expectation of today’s customers. The impact of MSL on your ROI is obvious and you need to make a change.
How does automated replenishment work?
An Automated Replenishment system enables you to manage your reorder levels based on real world data, factoring in how much has [actually] been sold historically. At the heart of the system is an algorithm which combines real-time data analysis on key metrics across all your stores and e-commerce. Metrics like:
- Sales daily run rate
- Supplier lead time
- Days cover
- Existing stock in store
- On order stock
- Stock in transit
The algorithm does the hard work for you by automating the data analysis and determining the required reorder levels to replenish your stores, and the optimum inventory to purchase from suppliers. The system can also automate the stock transfers from your warehouse to your stores and generate purchase orders that can be reviewed before they are sent to suppliers. In the time it takes you and your staff to manually manage stock transfers and purchasing, your algorithm has already done a calculation across your entire supply chain and started implementation based on proven principles of retail buying. You stay in full control of your business; the powerful algorithm can provide both automated and suggested replenishment capability to guide your decisions. An automated replenishment solution is a standard [out of the box] feature of any modern POS software system and it can be tailored to meet the specific needs of your business.
What are the benefits?
Implementing an automated replenishment solution will deliver a range of benefits for your retail business including:
- Revenue growth – remove the risk of overstocks and understocks, maximise the return on capital investment in inventory, reduce excess stock and the need for clearance sales and minimise stock outs and lost sales
- Improved efficiency and effectiveness – make better informed purchase decisions working with accurate data for every single stock item will make it easy to get the right stock in the right store at the right time.
- Identify issues and anomalies – Say two stores have similar demographics: one is reporting a low run rate on specific products which are selling well in the other store. Rather than just ordering more stock, you are empowered to investigate and use your data to determine the source of the lost sales - and do something about it.
- Staff capacity – save up to 50% of labour time currently deployed on manual purchase administration enabling staff to focus on high value activities.
- Improved customer experience – you will always have stock to meet the demands of your customers week on week.
- Scalable growth – expand your operation without needing to invest in administrative resources.
By arming your retail business with reliable live data and systems to automate replenishment using proven algorithms, you can transform your business efficiency and customer experience. At Retail Express we have helped our clients to leverage automated replenishment to become leading forces in their industry. To find out how other retailers in your category have made this work for them, simply register for a free interactive screenshare today.