If your business sells a tangible product, here’s a strategy to improve your inventory position.
This is especially important if your business sells Christmas items. In fact, it’s absolutely critical if your business is affected by Christmas.
Look at the items you carry. Have a printed list in front of you. If you can’t produce a printed list, you need to come up with a way of doing that even if it means entering everything into a spreadsheet like Excel.
You are going to classify every item according to it’s importance to your total sales picture. Keep the 80/20 rule in mind. Roughly 20% of your items are responsible for 80% of your business.
I recommend a scale that goes like this:
B (Basic) These are the important core items to your sales.
Run through the list and put a B next to the most important items you sell. This shouldn’t be more than 20-25% of the items.
Next is C These items sell well but are are not considered ‘BASIC’. Let’s call them critical. They’re important to stock.
The C level items will make up the next 20-25% of your total SKU count.
Next is level D These sell but slowly. You won’t lose customers if you are occasionally out of stock in a D item. Still, you don’t want to drop these items. The D level will comprise the next 20-25%.
Finally, we have the X level. These are the slowest moving or one-time promotional items you sell. If you are in a business that sells Christmas items, all Christmas related items are class X. You must NOT go beyond December 27th with ANY class X items still in stock.
Now, Go back through the list and further rate your B items as B1 through B5. Do the same with C and D. Rank 1 as being the best seller of the category and 5 being the slowest. You do not have to rank the X items.
Why do this? You probably have set minimum/maximum inventory level set if you’re well organized. You do this because you can adjust those min/max values based on rank. There will be items with minimum stock levels that do not need minimum levels. Order them when you run out.
Set up inventory rules this way.
You never want to be out of stock in any of your B level items. Never. You want to have a “just in time” system for C level items. You can order D level items when you run out unless the lead time is very long. Never keep much inventory in D level goods. If you can get a particular D level item in 5-7 days, sell all the way trough before ordering. Never keep more than a week’s supply of D level items. This will be hard to get used to but it’s okay to run out of a D level item. But it is never okay to run out of any of the B items. C level goods should be very tightly controlled.
If you follow this system, you will be more profitable. You will turn your inventory more often and you will seldom get stuck with discontinued items. And you will be aware of seasonal goods and will be diligent about clearing them before their season ends.
To clarify this, let’s use a small grocery store as an example. Here are some items with sample ratings.
Whole Milk B1
2% Milk B1
1% Milk B3 (People WILL go with 2% if you are out of 1% but you should always have it)
Sandwich Bread (White) B1
Rye Bread C5 (a few people always buy it but often it gets stale because the minimum order is 5 loaves. Okay to run out occasionally)
Toilet Paper B1
Paper Towels B4
Dinner Napkins D1 (They can buy paper towels)
Christmas Cookies X
Basic Mustard B3
Hot Chinese Mustard D1
Hot Dogs B4
Lunch Meat B2
Filet Mignon D5
Pink Grapefruit C1
I think you get the idea. Do we need a min/max value set for pink grapefruit? No. I’m trying to get you away from assigning every item a min/max value. Setting min/max on every item will cause you to carry too much inventory and it will always evolve into an out of balance inventory. Always.
The reason this is so important is that it reminds you to NEVER run out of B items. And it reminds you that that it’s okay to run out of C items. In a cash crunch or slow sales period, cut back everything but stay in stock with your B class items.
I see many small businesses set minimum quantities for stock items but in total, all those minimums add up to too much inventory. Too often that will translate to not ordering the B items until the inventory is reduced. And where are the dollars? Tied up in C and D items!
Remember! You do most of your business in 20% of your SKUs. You never want to run out of those items! Ever. Doing this can improve profits by a huge amount even without increasing sales! You will almost certainly see a sales increase because you will always have the B items in stock. I will explain in a future post how to increase profit by 20% without raising prices or sales.