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‘Replenish to Consumption’ is suboptimal in certain situations.
Many companies, implementing inventory replenishment system for the first time, often take the easier route of replenishing to consumption at each node. It sounds logical and some industry leaders still operate this way.
This particular logic works well only in a specific context, where demand is steady and the demand drivers don’t vary over time. In all other contexts, companies find that stockouts and inventory pileups continue to happen.
The flaw in this logic is the assumption that inventory buffers should be static. Since the objective of inventory buffers is to absorb demand variations and supply unreliability, these buffers must be dynamic.
If you apply the ‘Replenish to Consumption’ logic, chocolates will get stocked out during Diwali, cakes will get stocked out at Christmas, and turkey will be in huge shortage on Thanksgiving Day! In case of seasonal products, you will see stockouts at the season beginning and pileups at the season end.
The right replenishment logic resizes the inventory buffers in each of these specific situations, as well as on an ongoing basis as demand patterns change. Replenishment quantity is derived based on consumption and change in inventory buffers.
Let’s ensure that the replenishment logic is implemented ‘Right First Time’ for minimising stockouts as well as inventory pileups.