Can you stock everything your customers want? How big would your warehouse need to be? Almost every company is trying to provide one-stop shopping for their customers, which means that inventory assortments are expanding more and more. If you’re a building materials company, chances are you stock nails, screws, insulation and 2x4s aplenty. If enough customers want Cat5 cabling, you could add that too. And then the tools to install the cabling. And then, maybe server racks?
The fact is, you can’t stock everything. So, what can you do to ensure that the exploding assortments are as successful as possible? By adopting the following 4 simple steps, you will be better positioned to offer your customers the products they want while systematically removing the items put your finances under pressure:
- Analyze your assortment and identify what products matter most to your customers
- Prioritize items within your assortment in order to determine a more strategic stocking strategy
- Establish robust business rules to ensure your assortment remains in line with the corporate objectives of your organisation
- Re-focus your investment, time and energy on the products that add the most value
One of the leading causes of obsolescence, excess stock and firefighting is that planners spend too much of their time focusing on the wrong products. However, undertaking a carefully considered ABC-analysis can provide a perfect solution to overcome this issue.
Step 1: Conducting an ABC-analysis
An ABC-analysis starts with the division of all stock articles based on their contribution to the overall revenue. You will find out by yourself that 80-90% of your total revenue is generated from a meagre 10-20% percent of all the items within your assortment. It would be best if you made a similar analysis based on the contribution to the profit margin. The final ABC-analysis should be based on both revenue and profit margin, resulting in three article categories in which A-items contribute the most and C-articles the least.
Step 2: Determine the right stock strategy
The stock strategy is focused on two things: when to order and how much to order. What this strategy should depend on is the item category. In general, to prevent costly out-of-stock situations, you would most likely place orders for A-items more frequently than C-articles. For every category, a balance must be found between the target service levels and the costs of inventory.
Step 3: Set the parameters
The stock strategy you’ve chosen in the previous step should be translated to the right parameter setting in your inventory management system. How should the service level be taken into account? What should the order moments be based on; fixed or variable intervals? How should the order quantities be calculated?
Step 4: Focus on A-items
Once the correct parameters have been established, the planners can pay full attention to the products that require it most. Given the importance of A-items, this will mean that the planners should focus on these items. Thus, monitoring sales forecasts and keeping a close eye on how demand is developing is critical here. Are there peaks in demand? Should any of the estimates be adjusted as a result of any new market information or planned promotions?
To prevent obsolescence, it’s also essential that planners have a tight grip upon product lifecycles. Is an article beyond its peak level, and is demand decreasing? Is it time to switch to a new forecasting strategy?
By adopting the steps above, your inventory levels will decrease dramatically. Furthermore, through establishing more appropriate service levels, planners can ensure they focus their time on where it is required most — ultimately resulting in higher profits and happier customers.
Perfecting your assortment requires knowing how items move through your business, from receiving to your customers’ hand. Slimstock helps companies optimize their inventory by taking a complete look at your inventory strategy and adjusting stock levels according to factors like location, market differentiation, seasonality, promotions and even weather. Talk to one of our helpful inventory consultants today and see how we can save you money by lowering excess tock while increasing service levels.
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