The Expert Guide to Retail Allocation and Replenishment

As with many retail, wholesale, and CPG processes over the last several years, there has been a rapid evolution related to optimizing inventory. Historically, retail business processes viewed product distribution in very distinct silos: one focused on procuring products to meet customer demand, while a separate process focused on moving currently owned products to the selling locations. These processes were often handled by entirely different teams, with little coordination or collaboration.

To help define and understand how these activities relate, it is important to level-set some key terms:

A network between a company and its suppliers to produce and distribute a specific product to the final consumer. This network includes activities, people, entities, information, and resources. The supply chain also represents the steps to get the product or service from its original state to the customer.

Demand forecasting is the process of estimating future sales over a specific period. Generally, demand forecasting considers historical data, seasonality, and price sensitivity analysis and may also include more advanced factors like economic conditions.

The business processes and systems that support how a retailer or consumer brand views, buys or sources, manages, and moves quantities of items and/or SKUs throughout their entire network.

The process of preparing, organizing, and shipping an item or an order to arrive at its destination.  Fulfillment typically includes allocation and replenishment.

Omnichannel maturity and dramatically changed customer expectations have forced retail and consumer brand organizations to evolve how they view and organize their inventory movement and distribution processes. Leading retailers and CPGs look at the entire end-to-end supply chain, including the allocation and replenishment processes.

Moving through the decision tree will culminate in a decision to either use replenishment or one of the three allocation outcomes:

While the inventory flow path is important to the fulfillment strategy, it is equally important to consider that critical rules and parameters apply to both allocation and replenishment, including such factors as vendor lead time, minimum order quantity, desired weeks of supply, safety stock, minimum presentation, and others. As these processes continue to evolve, many of the leading solution providers in this space approach fulfillment solutions as a unified process instead of the legacy approach of addressing them as individual functions. One critical component of this approach is the shift to incorporating more intelligent, forward-looking forecasts that leverage data and analytics to determine future demand needs.

As mentioned earlier, retail allocation and replenishment—along with other supply chain functions—were historically managed in silos. Leading practices are much more unified and collaborative than traditional or common practices.

There are several common challenges and mistakes in retail allocation and replenishment. Many of these are driven by legacy business processes and antiquated systems.

Without the benefit of a demand forecast that leading solutions provide, allocation and replenishment organizations rely on historical data and static formula-based need calculations.

Legacy allocation and replenishment solutions typically only consider actual sales, not total demand, which would compensate for lost sales due to out-of-stocks and substitutions.

Leading retail demand forecasting solutions will evaluate seasonality, promotions, and impacts of pricing and incorporate product attributes to aid in improving demand drivers, ultimately enhancing forecast accuracy.

An accurate prediction of demand is fundamental to effective distribution.

While a modern demand signal is critical to driving optimal decisions, this demand signal relies on accurate transactional history. Without controls and balances embedded in the ERP systems to identify imbalances, allocation and planning teams are at risk of making bad decisions and losing the credibility of their merchant partners.

Poorly managed master data including inconsistent descriptive information, outdated operational flags, limited product and location attributes, and no methodology for the archival of old products can also lead to erroneous decisions and impact efficiency.

The inability to see real-time product quantities at selling locations and distribution centers leads to poor allocation and replenishment decisions.

Retailers and consumer brands who do not share inventory across channels might be missing sales and overstocking their locations. Enabling this capability may require complex business rule engines in merchandising and order management solutions to support the business and optimize the order fulfillment process.

Forecasting demand becomes complicated in this scenario, as the location generating the demand often differs from the inventory source used to fulfill orders. It is important to understand how the business manages its omnichannel demand, and how those priorities and rules impact the allocation and replenishment systems and processes.

Examples of constraints include start-ship dates, product availability, warehouse capacity, storage capacity at retail stores, and supply chain lead times. These constraints can create overstocked and overflowing warehouses and storage areas, increased storage costs, missed business opportunities (i.e., when items arrive late), and increased labor costs.

In scenarios or environments where the item lifecycle is not considered, the product is often received too close to or after the intended promotion, holiday, peak selling period, end-of-life, etc.

This mistake goes back to the legacy allocation and replenishment approaches and systems. In many clients, we have seen that different, independent teams are devising the financial plan, creating the marketing strategy, building the assortment, purchasing products, and making allocation and replenishment decisions. This old way of working typically relies on a manual merchandise calendar which risks creating massive disconnects across the retailer’s supply chain.

In many cases, teams are so buried in plowing through their to-do list of time-sensitive execution tasks that they do not have the time or processes in place to review the effectiveness of fulfillment strategies in prior periods or seasons. The absence of hindsight may prevent picking up key changes or impacts to the business and often compounds issues that contribute to suboptimal inventory placement.

True to any transformational effort, three foundational pillars in achieving allocation and replenishment maturity are people, processes, and data/systems. To successfully drive sustained transformational change in any of these pillars, retailers must also integrate a robust organizational change strategy as a key component in initiatives designed to advance their fulfillment capabilities.

Reviewing and clearly defining roles and responsibilities is critical, as leading retailers are breaking down silos between allocation/replenishment and planning teams, and in some more forward-thinking organizations, including supply chain teams in this effort. This more collaborative environment does not have to be system-driven but can start with assessing and revising the communications and relationships between allocator/replenisher and buyer/planner roles.

Once clear roles and responsibilities are defined, it is important to develop additional skills that are required to support the new, more collaborative, and connected fulfillment environment. While traditional inventory management skills are still important, developing skills related to communication, forecasting, understanding promotional impacts, and more advanced analytics will be necessary to support the enhanced end-to-end fulfillment processes of tomorrow.

In a similar approach to reviewing and revising relationships and communications, the business processes around fulfillment and supply chain should be assessed to identify areas for moving toward more collaboration and end-to-end visibility.  While breaking down some of these silos may be challenged by legacy system constraints, starting to understand exactly where roadblocks exist and outlining a roadmap toward more mature and efficient allocation and replenishment business processes can become the springboard for a retailer’s transformation in this area.

It is critical to have a meaningful product hierarchy, robust product and location attributes, and data governance processes to maintain clean source data for the solutions. Further, retailers must have accurate and timely transactional data, including SKU/location demand data and real-time inventory.

Traceability of transactional data for internal systems combined with controls and balances during the ETL process to the software vendor’s solution is essential to ensure users’ reliability and provide the ability to resolve issues rapidly.

Changes to an organization, whether they stem from changed roles and responsibilities, revised processes, or new systems are inherently disruptive. A strategic organizational change approach and aligned communication plan address predictable organizational impacts and help retailers and consumer brands prioritize actions needed to proactively mitigate the negative effects of change including disengagement, discouragement, and fear. Additionally, including impacted stakeholders throughout transformation efforts provides transparency and visibility of changes and increases the adoption and sustainment of new ways of working.

Selecting an allocation and replenishment system involves more than picking a new shiny tool. As part of the system selection, retailers must address old business processes and antiquated fulfillment roles and responsibilities. Without doing so, selecting and successfully implementing a new system will fall short of the expected benefits.

Specific considerations for selecting and implementing an allocation and replenishment system include:

Leading retailers and brands realize that to optimize inventory to maximize customer satisfaction and drive business results, they can no longer effectively manage allocation and replenishment steps in a vacuum. It is critical to holistically assess and design new supply chain processes that incorporate all the phases of the fulfillment cycle while considering role impacts and leveraging modern technologies that drive collaboration.