Director of Marketing, SortlyShahzad Karachiwala
Almost every successful business begins with a good idea and hard work. But there’s so much more to running a booming business than creativity and motivation. While inventory management is rarely at the top of anybody’s list, it is super, super essential to the health of your company’s P&L. After all, careful and smart inventory management almost always yields profits.
Understanding inventory control models and the principles behind them can help you better manage your inventory–and better run your business. One vital inventory control principle: the 80/20 rule.
The 80/20 inventory rule states that 80% of your profits should come from 20% of your inventory. The rule is based on the Pareto Principle, a management consulting principle that suggests that 80% of effects come from 20% of causes. It’s also called the law of the vital few.
Many people find that using Inventory management software can help them identify the most profitable 20% of their inventory.
Highest-value, slow-selling products – Actively monitor your most profitable inventory items. Prevent them from going out of stock.
Lower-value, fast-selling products – Identify lower-value products that sell quickly and keep them as the greater portion of your inventory. Reduce the quantity of, discount, or discontinue low-value items that aren’t selling.
The 80/20 rule is a guide for categorizing your inventory. ABC Analysis is an inventory technique based on the 80/20 rule. It has three categories, A, B, and C, to help you further prioritize and categorize accurately.
For example, if you sell pet bedding and sofas, your products are currently in demand. Your most profitable products (Category A) are $1200 sofas that sell an average of twice each week. Your $70 pet beds (Category B) sell an average of 10 times weekly. Other bedding items that sell well are in Category C.
ABC Analysis requires careful attention and accurate data to ensure your inventory is categorized correctly and results in profits, not losses. An inventory control system can help.
Whether you purchase raw materials or finished products, suppliers can affect your production schedule and sales. Automated inventory helps you track details about supplies, individual suppliers and their reliability, and how frequently you need to order. You might choose to change or use multiple suppliers to ensure you have enough supplies or products to keep Category A items in stock.
Sortly inventory management software uses QR codes and barcodes to track products and make it easy to apply the 80/20 rule to your inventory. You’ll enjoy features like:
Get help identifying the most profitable parts of your inventory by getting organized with Sortly! Sign up for a free 14-day trial.