THE PROFIT LAB // 10 Steps to Finding Profit in Localized Replenishment
8. STEP OUT OF THE COMFORT ZONE //
Step #8: What NOT to do (Part 3) – Presentation Stock
One of the most common ways replenishment systems are abused is by using capabilities for things that they were never intended. The area I have observed as the most common of these is the abuse of presentation levels, minimums, and/or counter stocks. In a properly executed environment these values are intended to be precisely what they describe: the minimum inventory level a product should ever be at within its active life.
Traditional replenishment systems are quite complex, especially for new users. As such, it is difficult to keep an appropriately trained group of people in place to manage them so they perform to their full potential consistently. Efforts to simplify this frequently result in simple shortcuts. One common shortcut is to compensate for erratic results by using presentation as a buffer. Doing this is in effect a shortcut to addressing the challenge of last week’s ‘what not to do’ – safety stock.
Another example is setting presentation levels equal to a pack quantity. The thinking is often that this will ensure we keep shelves in stock. The reality is that, in a properly configured and running replenishment environment, this will lead directly to costly overstocks.
If you find yourself using presentation or its equivalent for anything other than being the minimum you need to make the inventory presentable, you more than likely have some real opportunity available. As an example, an item that lives for five months is considered to expend a holding cost per week equivalent to five percent of its underlying cost; these costs are higher for shorter-living items.
What can you do now?
Before we can turn off the “overrides” that an inflated presentation value represents, we need to be careful to understand why it is being done. More often than not it is just a safety or comfort level reaction. However, if there is an underlying weakness when presentation is not inflated, that needs to be addressed. This can generally be controlled by understanding and setting other replenishment criteria more accurately. If you have invested time in the areas discussed in prior posts to this series, you should have better inventory/service level targets, which are considering product roles, and you are compensating for forecast weaknesses with an appropriate safety stock.
If those areas are defined appropriately, presentation measures should be open to being set properly, which will quite likely reduce over-inventory situations.
What should you consider in the future?
If you are investing in the future, this topic has already been covered in “future” sections of the posts in this series. Having the capabilities described in those will free you entirely from needing to make presentation represent anything but the pure value it is intended for – aesthetics!
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