Are you familiar with the 80/20 rule? Also known as the Pareto Principle, this rule suggests that approximately 80% of results stem from just 20% of causes.
Retail stores apply this principle to optimize inventory management, and this method is called ABC Inventory Control.
In most retail stores, 20% of products account for 80% of total sales. To efficiently manage inventory, stores classify their products into three categories: A, B, and C based on their importance and sales contribution.
A-Grade: Products that generate the highest sales and require the most rigorous management.
B-Grade: Products that contribute to sales moderately and may occasionally shift between A and C grades.
C-Grade: Products with the lowest sales priority, requiring minimal management focus.
A-Grade inventory typically accounts for 80% of total sales. Although it consists of fewer items, these are the most crucial products in a store due to their high turnover rate, making them the top priority for inventory management. To prevent stockouts, stores should implement a regular ordering system, ensuring that backup inventory is always ordered in advance. A-Grade inventory management is characterized by frequent but small-sized orders to maintain optimal stock levels.
Regular Ordering System: A method where inventory is replenished at fixed intervals, with order quantities varying based on stock levels.
B-Grade inventory accounts for 15% of total sales. While not as critical as A-Grade, B-Grade inventory can shift to either A or C categories, requiring careful monitoring. The best approach is to manage B-Grade similarly to A-Grade but with less frequent and slightly larger orders. The fixed quantity ordering system is commonly used for this category.
Fixed Quantity Ordering System: A method where a predetermined amount is ordered without a fixed schedule.
C-Grade inventory represents 5% of total sales. It consists of a large number of items with slow turnover rates, making it the lowest priority for inventory management. The Two Bin System and Just-in-Time (JIT) approach are effective methods for managing this category.
Two Bin System: Uses two storage bins—once the first bin is empty, the second bin is used, while the first is restocked.
Just-in-Time (JIT): Inventory is ordered only as needed, preventing excess stock accumulation.
Strategic inventory management directly impacts store profitability. If your store has an excess of C-Grade inventory or a shortage of A-Grade products, consider implementing the ABC Inventory Control method to optimize stock levels and boost sales performance.
