Automatic Replenishment System
There are a lot of companies talking about IT systems to better manage inventory but I kept wondering how things work. In recent times GoColor, Page industry too talked about it in length, in the past it was a great moat what Asian paint enjoyed - Saurabh Mukherjea used to say Asian paint know what customer will buy before dealers meat customer. Let's understand it better.
What is inventory?
Inventory refers to the stock of goods or materials that a business holds for production, sale, or distribution. It includes the raw materials, work-in-progress items, and finished products that a company has on hand at any given time
Money is made only when the product is sold to the end customer but the business spends money along the production. Businesses that could reduce inventory days could optimize working capital in business. End-of-the-day system has to run optimally from the manufacturing to the consumer if something is not sold or if they don’t have a product that the customer wants it is a loss for the organization.
What was the old system?
Traditionally Push based system was in place - in this replenishment, decisions are made based on the forecast and projections generated by the manufacturer or supplier. A major factor was inventory is produced and pushed based on the producer forecast or assumption.
The major issue of Push based system is that it creates a frequent inventory shoot-up or customers having to wait for the product as a product was not available which is not a good situation for a business.
What is a new system?
Automatic Replenishment System also known as an Automatic Reorder System, is a method used in inventory management to automate the process of replenishing inventory. It is designed to ensure that inventory levels are maintained at optimal levels without requiring manual intervention.
The system is driven by the bottom-up forecast and projection done at retail or where the product is consumed. The orders are placed from the system based on inventory requirements and future consumption with consumer trends.
Most modern systems' efficiency is lot driven by large data and AI models. To consume data it integrates CRM for customer data, Point-of-Sale to know sales and demand patterns, inventory to know stock levels, demand forecast to estimate, and social media or customer review to know customer trends. This overall data helps ARS forecast based on the history and adapt to customer behavior change.
How different is ARS?
The forecast from the top has been changed to the bottom where the product is consumed and has a real-time connection to the end customer. Customer-level demand triggers the inventory that helps the system to maintain the optimal inventory.
To explain further, let's talk about a restaurant chain Appa Kadai which operates in Dubai. They sell Biriyani in all its restaurant but the cooking is done in its centralized cloud kitchen and daily it gets distributed to all the restaurants. The biggest challenge in this approach is how many Biriyani are to be sent to a particular restaurant - if they could not sell that day it has to be thrown out as it is perishable. What the restaurant did is introduced an incentive system for the restaurant manager in such a way that they have a commission for the sale but there is a penalty if some quantity is left end of the day. This helped to estimate better sell more with minimum unsold inventory end of the day. It is nontech but highlighted the power of forecasting at the consumption level to increase the accuracy of the inventory.
To understand the conversation inventory in different levels inventory can be at the Distribution level, Trad level, and Retail level. What are they? The company uses different distribution channels lets us understand inventory from that perspective.
Multi Brand Outlet (MBO)
Large Format Store (LFS)
Distribution level: At the distribution level, the manufacturer supplies the MBO/LFS with its products. The MBO/LFS acts as an intermediary or distributor. This could be Brand distributors.
Trad Level: At the distribution level, the manufacturer supplies the MBO/LFS with its products. The MBO/LFS negotiates and procures products in bulk from these intermediaries, taking advantage of wholesale pricing and favorable terms.
Retail Level: At the retail level, the MBO/LFS showcases and sells the manufacturer's products to end customers.
Data for Manufacturer ARS:
Manufacturers usually rely on sales reports, purchase orders, or periodic inventory updates provided by the MBO to gauge the performance and demand of their products. Retail data depends on the specific agreement or contractual terms between the manufacturer and the MBO/LFS.
Exclusive Brand Outlet(EBO)
Distribution level: distribution level, the manufacturer supplies the EBO with its products. This involves the manufacturer distributing its goods to the EBO's distribution centers or warehouses.
Trad Level: It is not applicable for EBO.
Retail Level: At the retail level, the EBO showcases and sells the manufacturer's exclusive brand products to end customers. The manufacturer's inventory is displayed and made available for purchase in the EBO's retail outlets or online platforms.
Data for Manufacturer ARS:
As the company manages the full cycle they have the option to utilize data from all along the chain of retail operation.
There are different levels of inventory that need to be handled to make the product reach the end customer. The information organization gets and the approach they have taken will depend a lot on how a business operates. I still need to more about how different levels of inventory and sales channels get integrated in this time is subject I have to study more.
What companies like Page Industry and others are talking about ARS
What went wrong in ARS for Page?
In Q3 the demand forecast was positive and sales had a very healthy growth. As expected ARS kept the inventory in check. The company saw a sudden change in customer trends as people delay the purchase and sift in demand for the segment where people preferred product catalogs of outside-house products rather than stay-in-house products. The change in trend reduced sales and inventory got built.
The major challenge was at distributor level inventory which was built more as they had kept extra inventory to handle supply disruption. It is across industry phenomenon that a company kept its inventory to handle supply disruption, as things back to normal and demand got impacted the inventor too got affected.
In the case of Balkrishna. In the uncertain time, shipping time was more to keep the RM inventory at a healthy level they had to keep the RM inventory in transit more to handle. As the economy is back to normal the shipping time is reduced with the RM price leading them to have a longer holding time for high-priced inventory.
What Page want to improve in its ARS?
The Company thinks it would take another 2 quarters to be completely put things behind as they need to keep in mind operating the plant at optimum level.
As Improvement company won't have SKU(product specific) ability in the system to push new SKUs in demand when the inventory level is in a healthy state. When a change in customer trends is observed they could start pushing new SKUs to the inventory.
Summary:
Another challenge is that ARS systems can be expensive to implement and maintain. This is because they require a significant amount of data and computing power. As a result, ARS systems are often only feasible for large businesses with a lot of resources. The automatic Replenishment System too can go wrong at the end of the day ARS too depends on forecast. Organisations keep improving on the data and the system to evolve to become better.