Suppose that you are starting a distribution implementation in a retail chain that has about 70 stores with over 8,000 SKUs. You’re about to define the buffer sizes so one of the obvious questions is what is the replenishment time from the Central Warehouse to the stores. The logistics manager tells you that whatever you order will arrive the following day. Since stores will start ordering daily whatever they sell, what is the replenishment time? One day, right? Think again because it’s almost impossible to have one day replenishment time. To explain why we first need to answer what does replenishment time really mean.
Replenishment time is defined as the time that passes from the moment when a unit is sold or consumed until the moment when this same unit is replenished. So let’s make some assumptions in our example above and calculate the correct replenishment time. Let’s say that the stores open every day from 10 am to 10 pm. Let’s also assume that they order before opening the store and that the shipment arrives the next day in the afternoon. To calculate the actual replenishment time let’s ask ourselves when is an SKU that is sold during the morning of Day 1 replenished? This unit won’t be ordered until next day before opening the store, so there goes one day. And since the shipment arrives on Day 3 in the afternoon, the inventory won’t be available until the beginning of Day 4 because the store has to process the shipment (count it, enter it on the system, unpack it, store it and exhibit it) which will probably take place late at night or early next morning. So this means that replenishment time is actually 3 days!
But that’s not all. Suppose that after establishing the buffers you realize that the stores don’t order on Saturday or Sunday because the people at the Central Warehouse don’t work during the weekend. And since sales during the weekend are the highest, the stores take a whole day processing the inventory received on Tuesday. Remember that the quantities received on Tuesday correspond to sales made on Friday, Saturday and Sunday. This means that a unit sold on Friday morning isn’t replenished until Thursday morning; almost a whole week!
Is this a really a choopchik? Many TOC experts could argue that DBM will take care of that and that we don’t need a PhD when determining buffer levels. But with such short replenishment times a one or two day difference can definitely increase the risk of shortages. Besides, one of the first actions in a Distribution implementation is to return excess inventory to the Central Warehouse. What do you think will be the store manager’s reaction when he or she sees that part of the inventory that was sent back to the Central Warehouse returned a couple of weeks after?
Even though we should always address incorrect policies – like not ordering during the weekend or ordering just in the morning – instead of increasing inventories, the purpose of this article is to really understand what replenishment time is and how to calculate it correctly. Even if you start with an overestimated replenishment time, you’ll most probably end up with buffers that are less than current inventory levels, so you’ll still get an overall reduction in inventory, and DBM will further reduce buffers to reflect the real replenishment time.
