How we classify your inventory
It is difficult to view hundreds, or even thousands, of inventory items every day and make an informed decision on what to buy, what’s running short and what you have too much of. The best way to get to the most important items is by classifying your items.
Why is classification so important? Because classifying your items allows you to focus on the 20% of the items that will give you 80% of your sales.
Let’s take a closer look at what the App does to help you with classification.
Identify and exclude obsolete and non-stocked items
The following items are excluded from classification:
- Obsolete items; that you no longer purchase under any circumstances.
- Non-stocked items; that you only ever order when a customer orders from you.
The identification of obsolete and non-stocked items can be accomplished by:
- Maintaining an indicator in your ERP; this option is dependent on your ERP having a standard or user-defined field for this purpose.
- Configuring rules within the App; additional rules can be configured within the App to further refine the stocking indicator.
You can find out more about setting the stocking indicator by watching the tutorial.
Classify the remaining (stocked) items
Measured by Value = ABC
Classifying your stocked items by the value of historical sales or future forecasts, ensures that your most important items from a sales value perspective are flagged as A items.
For stocked items:
- A category items typically represent the top 80%
- B category items typically represent the next 16%
- C category items represent the last 4%
Measured by Velocity = High, Medium and Low (HML)
In a classic ABC categorisation, items with high unit sales but that are inexpensive get lost in the C category. To address this deficiency with the traditional ABC classification approach, your stocked items are also classified by sales velocity (the number of unit sales).
For stocked items:
- H category items typically represent the top 80%
- M category items typically represent next 16%
- L category items represent the last 4%
The power of the Matrix
Once each stocked item has been categorised by both ABC and HML, plotting ABC and HML together results in the matrix – giving you insights into your inventory based on movement profile.
Now you can hone in on items displaying different characteristics, for example:
- AH items: your most critical items as they are fast moving and high value, and make up the bulk of your sales
- AL items: your expensive slow moving items, where over-stocking can be very expensive and the risk of obsolescence is high
- CH items: these items move very quickly but are typically small and inexpensive, so we can buy bigger quantities without adding much to overall inventory value nor risking obsolescence
- CL items: these items do not contribute much to the business and could be considered for de-ranging
Using the Matrix to set inventory policy
Having segmented your items based on movement profile, you are now able to set appropriate inventory policy for items requiring different inventory stocking policy approaches. This involves defining the target service level settings for each segment and how often you want to order each segment.
- Green: generally the bulk of your business from a sales perspective, so setting an appropriate target service level is vital.
- Gold (AL): bulky, expensive and slow moving, so customers expect you will not always have stock. You can set lower levels of service here to avoid expensive mistakes.
- Gold (CH): very fast moving and inexpensive, so set very high service levels and buy bigger quantities. Customers expect that you will always have these and it doesn’t cost much to do so.
- Red: you definitely do not want to over-buy here, and typically there will be significant excess stock in this category already.
Why we classify your inventory
Classifying your items enables you to focus your attention on those items that have a significant impact on your business, either positively or negatively.
Setting appropriate inventory stocking policy based on the matrix ensures that all purchase recommendations drive your inventory towards a better balance:
- The highest level of service
- For the lowest investment in inventory
Everyone is time-poor these days. When reviewing exception lists in the App, use the classification to prioritise which items to review.
- Start with green
- Be careful with gold
- Then review blue
- Review red last
Download the infographic
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