The Importance of Classifying Inventory

Visit Website View Our Posts

Classifying inventory is one of the most basic, yet essential and strategic parts of inventory management. Classifying inventory allows business owners to focus on items that make the most impact on their business goals while identifying items that aren’t contributing to the bottom line, are selling, or are obsolete.

Classifying items provides a better way to assign service levels to meet target fulfillment rates. The classification also simplifies the assignment of safety stock inventory to each item based on its contribution. Alignment of service levels to various classifications of inventory will unite execution with strategic intent. This will help with happy customers which means repeat business and recommendations.

Classifying inventory helps streamline your inventory management processes. With more predictability and fewer fires to put out, business owners can focus on the future rather than the now.

Inventory Tip: Classifying inventory, also known as SKU rationalization, provides additional benefits through a focus on items that contribute and the elimination of distractions on items that carry less importance. Your teams will be more effective with their time spent managing inventory.

How To Classify Your Inventory

There are issues that can occur when items are not classified properly. You will find below trigger questions that may help identify classification problems in your inventory. In the last 12 months:

  1. Were there items in your inventory that should not be ordered?
  2. Are the quantities of items that have been ordered correct? Are you left with too much (excess stock) or do you run out too soon (stock-out)?
  3. Does it take your team too much time to run through the inventory management process?
  4. Are your target fulfillment rates and safety stock level applied to all items instead of individualized based on demand?

Inventory Tip:  A common but costly approach to establishing safety stock is often applying a day of supply to each item. This blanket approach may be easy to assign and administer but often contributes to too much inventory on predictable items and not enough (stock outs) on items with less predictable sales.

Ways To Improve Your Inventory Management Classification Process

Business owners have unique inventory management needs based on a number of different business goals. Below are a few general guidelines that most business owners can benefit from.

  • Identify obsolete items that are inflating your inventory unnecessarily. A general rule of thumb is that things that have not sold in 24 months should be considered for the “Obsolete” classification.
  • Next, identify items that have not sold in the last 12 months and consider them for the “Non-stocked” classification.
  • The rest of the items that are selling and triggering orders consistently should be classified as A, B, or C items.
  • Compute the high, medium, and low velocities of the items.

Classifying items as A, B, or C involves a few calculations to identify cutoff points and ends with identifying the 20% of your stock that produces 80% of your revenue, or margin. This helps business owners focus on the highest-producing items, to ensure they are adequately stocked. The problem with only classifying products using the A, B, or C method is that it doesn’t account for cheap items sold at a high rate. Including unit sales or velocity, will ensure that these items don’t get improperly classified and cause issues with stock-outs.

Do you need help classifying your inventory? Contact StockIQ today.


Leave a Comment

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Show Buttons
Hide Buttons