Stock Management in Retail - Part 1: ERP Functionality to Consider

One of the many challenges for retailers today is their ability to respond quickly and appropriately to trends in consumer demand. To do this, you need to have the right stock in the right place at the right time. Choosing the right ERP system can help you meet that challenge.

An ERP system can be a valuable tool when managing stock levels, an essential requirement in the fast moving retail environment. This is not surprising, given that ERP evolved from Material Requirements Planning (MRP), a system devised in the 1960s for production planning and inventory control. The data required to make good stocking and replenishment decisions is captured by most ERP systems – what can differentiate them for retailers is the functionality available to forecast expected demand, propose optimal stocking levels and plan stock replenishment.

It’s a good idea to start off by thinking about why you need to hold stock at all. Obviously, you need to have stock on your shelves to offer choice to the consumer, but you also need to consider the other purposes that it serves. It is also important to remember that good stock management is not just about reducing stock levels and increasing inventory turns – it’s about having the right amount of stock in the right place at the right time. Having too much means valuable space is wasted, cash flow is impacted and excess stock is either written off or sold at a reduced price. Having too little can mean that the sale, and possibly the customer, is lost.

Demand Forecasting

One reason for holding stock is to cover uncertainty in demand. If you knew how much you were going to sell every day, then you would aim to have exactly that amount in stock every morning – easy! However, consumers are rarely that predictable, so instead, you need to make an educated guess, and that’s what Demand Forecasting does for you – it tracks sales and demand history and uses those trends and statistical formulas to calculate expected future demand. This forecast can then be used when ordering from suppliers to cover expected requirements within lead-time (i.e. the length of time from when the need for an order is identified to the time when it is delivered).

Stock Optimisation

When deciding on the amount of stock to hold and where to hold it, all levels of the supply chain need to be considered. This will span from suppliers to the store shelf. The strategy will probably vary by product, product classification and supplier. The system should help by dynamically calculating the optimal stock level (i.e. the average required to provide a given fill rate). This should be calculated at every level for every product and will usually take into account forecasted demand, the mean average deviation from the standard demand pattern, the product lead-time, the replenishment frequency and the desired service level. After that, factors such as carton sizes, minimum purchase discounts and other discounts available may be considered, as will the amount of space available. It is important that the target stocks are dynamic and are amended regularly to ensure they reflect latest demand trends.

Stock Replenishment

Stores are replenished either directly from a supplier or from a centralised distribution centre. The goal when determining the frequency of stock replenishment is to get the balance right between stock levels at the store and the cost of replenishment. Once the optimal stocking level has been set, the trigger for replenishment should be actual demand rather than forecast, as this will ensure that the stock held reflects the true demand pattern.

These are just some of the areas where ERP can help with stock management in retail. Different retailers will have different requirements and the functionality available advances quickly in line with changes in the business environment. Best practice now recommends using Vendor Managed Inventory (VMI) or Collaborative Planning, Forecasting & Replenishment (CPFR) with key suppliers. Both of these approaches involve close collaboration with suppliers to manage stock levels throughout the supply chain and thus keep costs low for all involved.

This is also an area where a tightly integrated best of breed system may be a better solution, so it is important to document your specific requirements and use a structured methodology to select the product that is best for your business.

See also Stock Management in Retail - Part 2: ERP System Requirements.

This blog was written by Ursula Browne, Principal Consultant at Lumenia. If you would like further information on ERP Stock Management in Retail or on any other aspect of ERP please send an e-mail to Ursula Browne.