Advanced Planning and Optimization Part 6: Allocation/Replenishment

Advanced Planning addresses the major functions supporting retail merchandising activities. An overview of these Advanced Planning functions was given in our first article and they are shown below. We have previously addressed Merchandise/Store Planning, Store Clustering, Assortment Planning as well as Space Panning. This article considers Allocation and Replenishment.

Retailers today are beginning to consider advanced planning in developing localized assortments and maintaining a customer-centric merchandising environment. Advanced planning functions all work together to provide the necessary product to address the individual customer need and store characteristics.

However, planning the product assortments and space utilization is only the first step in the process. Each retailer must then address the execution of the plans and the movement of actual product to the store locations in the right quantities and at the right time. Allocation and Replenishment are the functions that address moving product to the stores.

Definition and Purpose
Allocation considers distribution quantities by item and store that will guide the movement of merchandise from the Distribution Center (DC) to the stores. The process addresses flow-thru merchandise (non-basic fashion and fashion basic items) that is usually received, packed and shipped to stores at the start of an assortment season (e.g. floorsets, back-to-school, holiday etc.) or after an initial distribution has been completed. Allocation may also consider warehoused items that are being "pushed" to the stores. There are two main types of allocation: pre-distribution and post distribution. For pre-distribution, the stores and quantities are determined at the time the PO is generated, while post-distribution considers quantities that are defined at the time the merchandise is received.

Replenishment considers the distribution quantities by item and store for warehoused merchandise that is put away upon receipt for later shipment. The process also considers vendor to store (drop ship) and vendor to warehouse (reorder) situations. Replenishment is an on-going activity for basic merchandise that is sold year round (e.g. socks, underwear. tools, hardware etc.). Shipments to the stores are generated on a scheduled basis or vendor orders are created as needed to re-stock the warehouse.

Both and Allocation and Replenishment take into account various constraints such as end-of-season, ad merchandise, key items, coordinate groups etc. Also, the processes may be combined with an item initially pushed to the stores via Allocation and then put on Replenishment for on-going store distribution.

Allocation and Replenishment Process and Methods
The key Allocation process functions are described below:
· Merchandise Available - the process starts with receipt of flow-thru merchandise in the distribution center. Based on POs, Automated Ship Notices and/or actual receipts, the merchandise allocations are scheduled (merchandise available for allocation). The merchandise available can also consider fill-ins from the warehouse that are being "pushed" to the stores, follow-up to initial allocations as well as promos; events and ad merchandise. Various review meetings take place between planning, merchandising and allocation to provide input for the allocation process.

· Parameters and Methods - the basis for developing the allocation quantities is reviewed and defined: store plans and store clusters are updated; data requirements and timeframes are defined; parameters and algorithms are updated; store locations are selected; special store situations are included; merchandise characteristics are considered; special buys and ad-hoc allocations are addressed. In some cases, initial allocations will be run and reviewed with revisions to parameters, algorithms etc. as needed.

· Allocation Quantities - the algorithms defined (e.g. open-to-ship etc.) are run and the allocation quantities by store are determined. For initial allocations, the latest assortment plan will be considered. Store forecasts are run to update the store plans. Various factors such as hold back, new/like items, coordinate groups, seasonal items, ad items etc. are addressed. Allocation quantities are reviewed and revised as necessary. Note: in some cases the allocation parameters and algorithms may be modified and the allocations are re-run.

· Review, Modify and Execute - a final review of all allocations by class or department is performed to define the impact at store level and consider the overall assortment plan. As necessary, quantities may be adjusted and/or revised parameters and algorithms may be used to generate new allocations. The allocations are then executed and merchandise is shipped to the stores. Periodically the effectiveness of the allocations process is reviewed and future adjustments are suggested to the allocation setup and execution.

The key Replenishment process functions are described below:
· Review and Analysis - the first step considers a review and analysis of both the warehouse and store results. Historical sales, receipts, shipments and inventory level by SKU/week are considered as well as the effectiveness of the present assortment. Problems and issues are defined including: over-stocks; out-of-stock; the lack of ad/promo support; vendor performance etc.. The items presently being replenished are reviewed and changes are defined.

· Parameters and Methods - the various parameters utilized in the development of order quantities are reviewed and modified as needed including: lead times; review times; order cycles; customer service levels; safety stock; forecast error etc. The various methods utilized are considered including: order point; order-up-to; min-max and forecast. Based on the latest assortment plan (basics and seasonal items), the items defined for replenishment are adjusted. In defining replenishment methods, consideration is also given to item importance including never outs, core and fringe (nice to have).

· Order Quantity Development - Replenishment is performed on a scheduled basis utilizing the parameters and methods defined above to develop both store and vendor order quantities. Other factors such as seasonality, end-of-season, promotions, ad items and product characteristics can impact the replenishment approach.

· Replenishment Execution - once the order quantities are determined, the execution phase begins. For store replenishment, the order quantities are the basis for shipments to the stores. For warehouse replenishment, the order quantities define the vendor orders with appropriate input concerning vendor minimums, quantity discounts, shipping requirements etc.

Other Considerations: Store Pull De-Centralized Environment
The Allocation and Replenishment processes described above considered a store "push" or centralized approach. In some cases, a de-centralized store environment is possible where the stores "pull" merchandise from the warehouse, DC or vendor based on a combination of central and store input. For store replenishment, a warehouse or vendor order is created for the store and the Store Manager has input to order or not order selected items. Likewise, for allocation, a suggested "push" to the stores is created and the Store Manager has input on the overall assortment selected.

A Note about Data Integrity, Data Accuracy and Data Cleansing
All Advanced Planning functions used to create plans and assortments are dependent on the accuracy and timelines of the information utilized. This fact is especially true in Allocation and Replenishment, where parameters, algorithms and various data sources are combined to automatically generate store shipments, warehouse orders etc. Bad data, incorrect data and/or missing data can cause very inaccurate results that will impact the critical outputs generated by these processes. Data integrity within support systems and data cleansing to alleviate bad or missing data is essential to ensure the accuracy and usefulness of the results.

Organization and Timing
Effective Allocation requires a team approach with planners, merchants and allocators often working together to complete the process. While the allocators are responsible for the allocation quantities, the planners and merchants are responsible for the review process and allocation effectiveness. With automated allocation having a major role in store assortments, the role of a store analyst is often needed to determine the effectiveness of the overall allocation process and address all store assortment issues.

Replenishment is often supported by a re-buying or inventory control activity to address both store and warehouse functions. For store replenishment the support function will address the smooth operation of the ordering function as well as the parameters and methods utilized. For warehouse replenishment, much the same tasks are necessary with the addition of the support for the vendor ordering process.

Replenishment is an on-going activity with a review and processing schedule defined based on various lead-time and other parameters. Allocation considers the start of an "assortment season" with an initial allocation followed by on-going allocations defined on a periodic basis, usually monthly. The Allocation timeframes are also impacted by receipt timing.

Automated Support and Interfaces
Successful Allocation and Replenishment require new special purpose systems to support the process and methods defined.

The Allocation system considers automation to address the following:
· Maintain history to support review and analysis
· Provide the capability to manage the selection of merchandise
· Maintain the parameters and methods required
· Maintain and utilize algorithms to develop allocations
· Provide the ability to address various factors and special conditions
· Provide integration with the latest Assortment Plan
· Provide for manual review and revision of store level allocation quantities
· Pass information to support the picking and shipping process in the Distribution Center

The Replenishment system considers automation to address the following:
· Maintain history to support review and analysis
· Support the replenishment forecasts, methods and calculations
· Interface to the latest assortment plan defining the replenishment item assortment
· Utilize forecasts and replenishment algorithms to develop order quantities
· Pass information to support the picking and shipping process in the Warehouse

Summary and Benefits
Allocation provides the capability to address the movement of non-basic flow-thru type merchandise from the distribution center to the stores based on various criteria and algorithms. Replenishment provides the capability to address movement of basic merchandise from the warehouse to the stores as well as from the vendor to the warehouse based on various parameters and methods.
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