What is a Replenishment Rate in E-commerce?
A replenishment rate in e-commerce is the rate at which inventory is added/restored in the warehouse to maintain the inventory and supply chain flow. It is used to measure a product’s success to help determine inventory needs and reordering strategies for retailers.
Significance of Replenishment Rate in E-commerce
The replenishment rate is an important metric in e-commerce because it measures how quickly inventory is replenished after a sale. The significance includes –
1. Increased inventory turnover: Replenishment rate helps businesses to maintain optimal inventory levels, reducing overstocking and inventory waste. Businesses can increase inventory turnover while avoiding stockouts by ensuring that stock is replenished at the right time.
2. Reduced costs: Replenishment rate helps businesses to reduce costs associated with inventory stocking. By accurately predicting customer demand, businesses can avoid ordering too much and minimize the amount of money spent on inventory storage.
3. Improved customer experience: By having the right product available at the right time, businesses can improve the customer experience.
Prerequisites to Calculate Replenishment Rate and How It Works
To calculate the replenishment rate, you will need the following information:
1. Inventory data for the past 12 months
2. Sales data for the past 12 months
3. The lead time in days for each item
4. The desired safety stock level
Once you have all of this data, you can calculate the replenishment rate using the following method-
Reorder Point – (Average Daily Usage x Average Lead Time in Days) + Safety Stock
Use Case With Replenishment Rate
Let us assume a company ABC uses 30 units of a particular item on the biggest day of production. The supplier could deliver this part in as long as 15 days. Let’s also assume that there are 10.5 units used each day on average and that the lead time is 12 days on average.
Therefore, the safety stock will be –
= (30 x 15) – (10.5 x 12)
= 450 – 126
Average daily usage = 10.5 units
Average lead team = 12 days
Safety stock = 324 units
Thus, using the reorder formula, the replenishment rate will be –
(10.5 x 12) + 324 = 450 units
The company needs to replenish its inventory when it touches 450 units.