Working with too many products in stock can lead to higher warehousing costs and can increase risk of damage, expiration and depreciation (all of which can lead to decreased turnover and profitability). Unfortunately, for many businesses, this problem is not uncommon. This blog post will help you determine the best way to deal with unwanted inventory.
Remember why you have product in stock – to meet or exceed customer expectations and to make sure that you meet your company’s service level. A commitment is made every time products are stocked. The product must be available for shipment or delivery to customers. Products you have in stock must meet this commitment, otherwise you can classify those products as unwanted. Unwanted items must leave the warehouse so you can focus on the right products. To fulfill an order you need to ensure that you have the right quantity of the right products in the right location at the right time.
If there are thousands of products in your product portfolio, how do you know what products should be stocked in the warehouse? Remember, you don’t have unlimited space. Let’s take a look at which method should be used in the example below:
- Total annual cost
- Profitable products
- Material value
- Numbers of picks
|Product NO||Number hits||Total Sold Quantity||Total Annual Cost of Goods Sold||Cost Price|
We suggest you sort the products on annual hits to determine the products you should stock. Annual hits represent the number of times each product was ordered by a customer, transferred, or used in an assembly in the past 12 months (regardless of quantity). A hit can be viewed as a product or an order. It does not matter if the customer orders one, ten or a thousand pieces of a product, it is considered a single hit.
Why do we rank inventory based on hits and not the total quantity or material value ordered?
Let’s compare #1000 with #3000.
#1000 has the largest total sold quantity and cost of sold goods, but is was only ordered two times during the last 12 months. #3000 was hit more than 80 times, meaning more than once every week during the year.
We have to remember the rule, “meet or exceed customers’ expectations of product availability.” If we want deliver and have a high service level the product must be in stock. For product #1000, an arrangement with the supplier regarding a drop shipment could be made since it only happens two times a year.
If we sort our products after number of hits it would look like this:
|Product NO||Hits||Acc Hits||Acc%||Rank|
After sorting your products into number of hits during the last 12 months, you can decide how to categorise your product.
|Rank of Hits||% of Hits|
|A||The first 80% of hits|
|B||The next 15% of hits|
|C||The next 4% of hits|
|D||The next 1% of hits|
Your rank categorisation can be based upon The Pareto Principle (also known as the 80–20 rule), 80 percent of total hits normally come from 15–20 percent of the total products stocked.
Given this analysis, examine each of the “D” and “X” ranked products. They stand for the last one percent of hits or no hits at all. After this, you can start asking why each one of these products needs to remain a stocked product.