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.
80-20 Inventory Rule Definition
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 Using the 80/20 Rule
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
Suppliers can affect your production schedule and sales, whether you purchase raw materials or finished products. 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.
Experience the simplest inventory management software.
Managing Inventory with Sortly
Sortly inventory management software makes it easy to apply the 80/20 rule to your inventory. In-depth reporting allows you to quickly see and segment your inventory’s value so you can make data-informed decisions. You can also rest assured that your inventory data is 100% accurate because Sortly enables your entire team to track and update inventory in real time from any device—rather than updating a spreadsheet later and risking inputting inaccurate or outdated information. You can also set low stock alerts to remind you when your inventory falls below a certain threshold, which means you’ll never run out of your most profit-driving items.
If your company would benefit from improved inventory management, try Sortly free for 14 days. Sortly lets you organize, track, and manage your inventory—from any device, in any location. Our easy-to-use mobile app lets you and your team update inventory on the job, scan barcodes from your smartphone, set low stock alerts to remind you to re-order, and more. That means you can work more efficiently, plan for jobs better, and serve your customers to their highest satisfaction. Join the over 30,000 professionals who trust Sortly as their inventory management solution and start your trial today.