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"The Inventory Optimization practice at RPE encompasses Planning,
and Space Management."
Source : RPE
Planning & Allocation vs. Replenishment:
When is Each the Best Strategy?
Replenishment Solutions is also known as :
Supply Chain Replenishment Solutions,
Implements Replenishment Solution,
Inventory Replenishment Solution,
Forecasting Replenishment Solutions,
Replenishment Processing Solutions,
Product Replenishment Solutions,
Robust Replenishment Solutions,
Employees Replenishment Solutions,
Wholesaler Replenishment Solution,
Developed Replenishment Solutions,
Enable Replenishment Solutions,
Warehouse Replenishment Solutions,
Existing Replenishment Solutions,
Replenishment Solutions Infrastructure,
Store Level Replenishment Solution,
Replenishment Solution Automates,
Replenishment New Solutions,
Inventory Replenishment Resources,
Advanced Replenishment Solutions,
Seeking Replenishment Solutions,
Material Flow Replenishment Solution,
Replenishment Planner Solution,
Consumer Driven Replenishment Solution,
Automatic Replenishment Solution,
Datacraft Solutions Replenishment,
Merchandising Replenishment Solution,
Replenishment Solutions Retail,
Optimal Replenishment Solutions,
Replenishment Software Solutions,
Responsive Replenishment Solution,
Optimized Replenishment Solutions,
Best Replenishment Solutions,
Replenishment Solutions Processes,
Cost Replenishment Solutions,
Management Replenishment Solutions,
Collaborative Replenishment Solutions,
Replenishment Solutions Supports,
Portfolio Replenishment Solutions,
Solutions Intelligent Replenishment,
Solutions Replenishment Automatically,
Continuous Replenishment Solutions,
Packaged Replenishment Solutions.
As a full line retailer, you carry many types of products to meet your customers needs. Everything from fashion
softlines to commodity hardlines is available in your stores. These disparate merchandise types have differing
traits and present unique challenges to your Merchants and Inventory Analysts. A frequently asked question is:
What are the best strategies for addressing forecasting and inventory concerns for various types of product? To
begin, let's define what we mean by Replenishment and Planning & Allocation.
What is Planning and Allocation (P&A)?
Merchandise Planning is defined as the process of setting and maintaining future performance goals for
sales, inventory and other financial metrics and tracking actual results and variances to those goals. Planning
decisions are based on historical trends and management insight into expected future changes such as number
of stores, calendar shifts, business shifts, and promotional events.
Depending on the needs of the company and the sophistication of the software supporting the process,
planning occurs at various levels along three dimensions:
- Product: item, style, sub-class, class, department, division, channel, company
- Location: store, district, region, division, banner, chain, channel
- Time: week, month, quarter, season, year
At each intersection of these dimensions there exist a number of variables such as sales, inventory on hand,
receipts, markdowns, gross margin, turn, etc. Not all of the variables are appropriate at all intersections
(sometimes known as vertices). In addition, multiple versions of plans (original plan, current approved plan,
what if plan, this year, last year) need to exist to support measurement of actuals and comparison to goals.
All retail organizations tend to perform merchandise planning at high levels such as department / chain / month
for key variables such as inventory dollars, sales dollars and gross margin. This level of merchandise planning
drives company decision making and provides a basis of success measurement internally and with external
parties such as stock analysts.
Some retailers take these high level plans down to lower levels of detail. Key item planning, store attribute
planning and the addition of unit planning for both demand and inventory is sometimes added to support the
ordering and allocation needs of a specific category.
Planning requires user intervention. Systems automate the planning process by spreading changes made at
higher hierarchy levels down to lower product, location or time levels, or aggregating changes at lower levels
back up the hierarchies. But decisions about changes to a planned variable must be made and entered by a
user. This approach allows planning solutions to apply to virtually all products.
The lower in the hierarchy the planning level is defined, typically the more time and effort is required. Most
companies cannot plan down to the item / store / week level because of the sheer number of combinations
requiring review and action. Because individual items eventually need to be delivered to individual locations,
but planning at the item location level is often not practical, merchandise allocation often goes hand-in-hand
with merchandise planning.
Allocation is the process of assigning individual item quantities to specific stores based on analytical
approaches that recognize the performance of those items and their history or potential at different stores.
Using multiple sets of rules and logic allows allocation to handle a wide variety of product types when planning
the buy or executing the distribution.
The objectives of allocation solutions are to minimize time required to allocate product and maximize profit by
reducing costs and aligning product placement with store opportunity to sell. Initially establishing allocation
models can be a time-consuming process. However, once established these models can be reused for the
allocations of successive purchase orders for product with similar or identical characteristics.
The Planning and Allocation (P&A) referred to in the rest of this document refers to the lower level planning
of unit sales and inventory variables for the purposes of inventory management - product purchase and
What is Replenishment?
Retail Replenishment can be defined as acquiring product on a recurring basis to support anticipated need.
Replenishment is best served as an automated process given the huge number of combinations of items and
store locations. Systematic creation and updates to demand forecasts and automatic creation of purchase
orders are common functions supported by most leading solutions.
To enable replenishment solutions to perform these automated adjustments and decisions, several item
/ location specific variables are required and considered in the process. Examples include presentation
minimum, seasonal selling profile, buying multiple, shipping multiple, order cycle, safety stock or service level
goal, leadtimes, vendor ordering requirements and daily updates to shipment and/or sales history and current
inventory. While most of the user-defined variables do not change frequently once established, the initial setup
effort for an item on replenishment can be time consuming.
Upon completing the up-front time investment, most replenishment systems can run on their own. Management
of exceptions and review of key reports helps to fine tune the system and thus the purchasing, but these
best practice efforts are not required for self-adjusting demand forecasts and automatically generated
order quantities. This automation greatly reduces workload for the inventory teams and is a major benefit of
The primary focus of a replenishment solution is profit improvement through management of item / location
level demand forecasts and inventory levels. While exception reporting and higher level data summaries are
available for many of the solutions on the market, the primary goal of a replenishment system is to maximize
sales and optimize service levels, while minimizing inventory investment.
You Have a Choice
Many retailers have software solutions that support both replenishment and planning and allocation. Managing
detailed forecasts and inventory ordering variables for the same item on both systems is not an effective
approach. The buying team has a decision to make: Which system is most appropriate for each product,
typically defined by category?
Compare and Contrast: How do these two methods compare to one another
Generally, replenishment solutions require more data and effort for initial item setup than do P&A solutions. This
is not to say that setup for P&A solutions is easy, but the number of variables required for demand forecasting
and ordering tend to outnumber those required for a P&A solution at these lower levels of detail.
P&A solutions tend to require greater effort weekly to maintain accurate plans and place purchase orders
than would a replenishment solution. Demand planning management and purchase order creation are efforts
requiring user intervention with P&A systems. Replenishment systems do not require user efforts for these
functions, although exception management and user fine tuning is customary to deliver the best results.
Management of exiting items is a challenging and time consuming effort with both systems. Both types of
solutions need user attention to decrease forecasts or plans, stop ordering, manage remaining inventory and
optimize markdowns and disposition.
When Planning and Allocation is Preferred
While both replenishment and P&A solutions can have various types of merchandise assigned to them, certain
traits predispose some products to be simply better addressed by the use of a P&A solution.
- Limited reorders - If an item is anticipated to have few or no vendor reorders after an initial purchase
order, P&A is the preferred option. Because one of the shortcomings of P&A is the incremental time
and effort required to determine order quantities, reduction in the exposure to this event helps a P&A
solution. Allocation, sometimes referred to as pre-distribution, can be used to distribute the acquired
product over several periods, so the key event to monitor here is the number of vendor purchase orders
- No history or like item - If the item in question is a unique item and sales patterns are not anticipated
to match other items and no demand history exists on which to base a demand forecast, P&A is
preferred. Because this type of item will likely require buyer review and management of the demand
forecast, benefits from a replenishment system's automatic demand forecast updates are minimized.
Items with erratic sales that are difficult to predict or quickly trending items also fall into this category.
- Heavily promoted and price adjusted categories - Items or categories that will benefit from
planning other variables such as price and margin will benefit from using a P&A methodology.
Replenishment solutions do not typically address impact of pricing. Therefore P&A solutions become
more attractive when management of retail prices to meet corporate goals is a major driver of category
- Highly fashion oriented / short life cycle items - Products strongly influenced by variables difficult
to interface into a software solution are good candidates for a P&A solution. Because replenishment
solutions will need user intervention to react to these types of quick moving trends, the already flexible
nature of P&A makes it the more viable option.
When Replenishment Works Best
Several other characteristics of the buying process dictate which items are best suited for replenishment
- Frequent reorders - Because of the automation that replenishment provides for demand forecast
management and order creation, items that are eligible for multiple vendor reorders are excellent
replenishment candidates. These types of products gain maximum benefit from the power of
replenishment solutions to automatically generate purchase orders, literally down to the item store level,
though typically summed up for delivery of the order to the vendor.
- New products with like item history - In addition, new items that have similar sales traits to
previously replenished items do well on replenishment solutions. These products have a reduced
initial setup effort if the replenishment system has a "copy item" type function. By removing the major
shortcoming of replenishment solutions - the initial item setup - the positives become even more
- Long lifecycle items - Extend the lifecycle of an item and the gains realized each period from the
forecasting and replenishment between introduction and exit are extended as well.
Transitioning from One Solution to the Other
Not every item always shows clear signs as being best addressed by only one solution. Often, items will show
characteristics that are best addressed by replenishment during one portion of its lifecycle and at other times
be best addressed by P&A.
Newly introduced items are often best supported by P&A. The attention to detail and focus on additional pricing
variables is needed the most when an item does not have a solid track record. As an item builds demand history
and variation settles down, moving to a replenishment approach can make more sense.
Items supported by a replenishment solution often benefit by moving to P&A during the end of its lifecycle.
Regular vendor ordering ceases and attention to markdowns and other variables increases in importance.
As with any transition, smooth handoff is key - especially if two different people or teams are involved. When
moving from P&A to replenishment for new items or from replenishment to P&A for exiting items, coordination
between buyers is important. Collect and transition all data and variables associated with the item when moving
from one solution to the other. Even more important is the passing of "soft" information about items. This type of
buyer insight should transition to the new team supporting the item when possible.
Inventory management is one of the main drivers of retailer profitability. With this financial influence also comes
a great deal of work. Selecting the best forecasting and buying approach for each product type can help drive
optimal performance while minimizing manual efforts. This decision making activity clearly demonstrates the
truth in the old adage: "Retail is Detail!"
About the Author
John Schwechel is the Replenishment Practice Lead and Senior Project Manager with Retail Process
Engineering, LLC. His background at Target Stores, Andersen Consulting, E3 Corporation, JDA Software and
Retail Process Engineering (RPE) gives him unique insight into retail change initiatives and their success
factors. Visit www.rpesolutions.com to learn more.
Supply Chain Replenishment Solutions
Implements Replenishment Solution
Inventory Replenishment Solution
Forecasting Replenishment Solutions
Replenishment Processing Solutions
Product Replenishment Solutions
Robust Replenishment Solutions
Employees Replenishment Solutions