What do I stock?
When determining which items to stock, start with your sales data:
- Use the number of sales transactions over a period of time to decide what to stock
- Use the cost of goods sold to determine how much to stock
- Use the profit to determine how critical the item is to your overall profitability.
The ABC (Pareto) Principle
The ABC or Pareto analysis is based on the premise that 20% of stock accounts for 80% of the value to the business. Let’s find that stock. Use the ABC analysis alongside each of the above dimensions.
Establish stocking rules
Determine your stocking rules and use your data to help find the items that fit the mold. You can pull from sales history, quoting, e-commerce data, customer feedback, lost sales data, and look at items that are critical to services, such as parts and accessories.
When setting up your rules, study the annual number of sales, the number of months the item sold in a calendar year, minimum quantity per sale, minimum quantity per year, and any recent history. Don’t hesitate to have different rules for different product lines; not all product lines are created equal.
When rules don’t apply
There are a few exceptional cases when your stocking rules won’t apply. Consider a hydraulic hose assembly. Without all of the parts that go with it, a hose is useless. You’ll want to keep various parts on hand to make sure you can fulfill complete orders.
These items should be exempt from your stocking rules:
- Repair/service parts
- Accessory items
- Routine maintenance
- Components for assemblies
- Raw materials used in the secondary process
- Revision tracked items
- New products
- Reels, remnants, odd lots, etc.
- Central distribution and rolled up usage
There will be cases when you aren’t armed with the correct data or a clear-cut history on which to base your stocking decision. Customer needs and preferences will change, new products will need to be introduced, and sometimes your best guess is your best bet.
In those times, it’s good practice to establish a budget for any inventory that is not backed up by data or history. This budget will help to reduce frivolous requests, give the sales team a clearly defined process to get what they need, and provide inventory managers with absolute visibility and traceability.
Set up weekly reporting for this inventory to keep people focused on moving the products it covers and gather as much data as possible.
Log the requests, items bought, and the requestor. An item class or user-defined field in your ERP system can help with organization. Continually ask yourself these questions:
- Was it a good bet? Did the inventory move? How long did it take?
- Do some requestors make better bets than others?
- Which customers follow through on their promises?
Give your sales team a questionnaire to help ask customers the right questions and help predict the product performance. You’ll want to set up a process for reviewing these items and determine when a product moves from speculative inventory to regular inventory.
The cost of lousy stocking decisions
When inventory goes dead, it becomes a future liability. Eventually, you’ll need to dispose of it with a write-off, liquidation, or scrap it altogether. Furthermore, dead stock takes up valuable warehouse space and cash. I don’t need to remind anyone that money is not an unlimited resource. Therefore, managers must make the stocking decision carefully and intentionally with good data.