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 essential to the health of your company’s P&L. After all, careful and smart inventory management can help 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.
What Is the 80/20 Inventory 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. Pareto inventory analysis can help you identify the most profitable parts of your inventory (so you can always keep them in stock) and identify the least profitable parts of your inventory (so you can keep their quantities at a minimum.
Inventory management software can help you identify the most profitable 20% of your inventory. By having a complete visual inventory with essential information like cost, price, quantity, order date, and more, you can easily apply Pareto inventory analysis and assess the most profitable items.
What should you do after identifying the most profitable items?
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.
How to Categorize Inventory
The 80/20 rule is a guide for categorizing your inventory. ABC Analysis is an inventory control model based on the 80/20 rule (which is based on the Pareto principle for inventory). It has three categories, A, B, and C, to help you further prioritize and categorize accurately.
- Category A – These products bring in 80% of your profits. Although they are only 20% of your stock and don’t sell as frequently or consistently as others, they need the most attention. And inventory control software, like Sortly, can help you monitor them and avoid running out.
- Category B – Items that contribute to 25% of your revenue and have good profit margins aren’t vital for your business. But they are selling well, so keep them as 30% of your stock.
- Category C – Although they aren’t high-value items and generate only 5% of your profits, they sell consistently. These items will make up about 50% of your stock and don’t require close monitoring.
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. Learn more about categorizing your inventory,
80/20 Inventory Rule and Category A Suppliers
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.
Managing Inventory with Sortly
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:
- Historical data – Track profits by item over the weeks, months, seasons, or years for ABC Analysis and determining product categories.
- Customized views – Add custom categories that work for your business model.
- Alerts and reminders – Set date reminders to order items, check with suppliers, start production for Category A items, or run a sale for items that you need to deplete.
- Multiple users with customized access – So everyone on your team can pitch in.
- Barcode and QR code scanning – Use your phone for an in-app scanner, and create custome QR codes, too.
- Anytime, anywhere access – Download the app on your phone or tablet, or use it on your computer.
Get help identifying the most profitable parts of your inventory by getting organized with Sortly! Sign up for a free 14-day trial.