Organizations with multiple stores or warehouses must assign an authorized replenishment path or “ARP” to every product stocked in each location. The ARP specifies the primary source of replenishment for each item on that branch’s approved stock list:
- Is it purchased from a vendor?
- Is it replenished with a stock transfer from a central warehouse or distribution center?
Making this decision for hundreds or thousands of products can be a daunting task. This process can be simplified by performing a “quick replenishment source test.” This process is designed to help you quickly decide if an item stocked in a branch location should be purchased from a vendor or replenished with a stock transfer from a central warehouse or distribution center:
- Determine your “potential inventory turnover” for each item stocked in a branch location. For example, you may be trying to turn over your average inventory investment six or eight times a year. This should be your goal, not necessarily your current annual inventory turnover.
- Calculate the total annual usage quantity for each item stocked in the branch location. This could be the total sales for the previous 12 months or the sum of the forecast demand quantities for the upcoming 12 months.
- Divide the total annual usage quantity (from step #2 above) by the “vendor package quantity” for each item, to determine the projected number of vendor packages of this item that you project will be sold in this branch each year. The vendor package quantity is the quantity of the product that must be purchased from the vendor. For example, if the vendor will sell you a product only in a case of 48 pieces and your annual usage is 960 pieces, you have the potential to sell 20 vendor packages in this branch (960 ÷ 48 = 20 cases).
- If the number of vendor packages determined in step #3 is greater than or equal to one-half the potential inventory turnover, the item will be assigned to group “A.” If the number of vendor packages from step #3 is less than the potential inventory turnover, the item will be assigned to group “B.”
- In most instances, you are able to transfer less than a vendor package quantity of an item from a central warehouse or distribution center to a branch warehouse. That is, you can open a vendor package and ship individual pieces. For this reason the lower turnover group “B” items should normally be replenished with a transfer of inventory from a central warehouse or distribution center. This will allow you to avoid surplus stock of these items from accumulating in the branch locations and allow you to maximize your overall inventory turnover of each of these products.
- Group “A” items should be replenished with a purchase order from a supplier, if the branch location, on its own, can meet the vendor’s requirement for a target order on a regular basis (e.g., at least once a month). The target order is the vendor’s requirement that allows you to receive the discounts or terms that allow you to competitively sell the vendor’s products.
- If the demand of group “A” items is not adequate to meet the vendor’s requirement for a target order on regular basis (e.g., at least once a month), group “A” items along with group “B” products should be replenished with a transfer from a central warehouse or distribution center.
While this set of rules will not work in all circumstances it may provide you with some guidance in effectively determining the replenishment source for each product stocked in a branch location.