Reducing the lead time by doing stock categorization improves overall productivity, resulting in higher revenues and profits. The Lead Time is the amount of time taken for a particular Stock Item to reach the warehouses from the date of ordering. Longer lead times often result in inefficiencies and wastage of resources. Businesses should review their processing times against benchmarks to identify ways of improving their lead times.
It is necessary to do stock categorization all the products or items into the below four brackets,
- High Value – Fast Moving
- High Value – Slow Moving
- Low Value – Fast Moving
- Low Value – Slow Moving
Let’s consider an example,
A business sells 5 units of the product on any single day. The Product takes 10 days to reach the warehouses after ordering. In order to fulfill orders, there must be the stock that lasts until at least 10 days in the inventory at all times. That means there must be at least 50 units of The Product, which will last 10 days, after which the stock gets replenished. A good strategy would be to keep at least 55 units of The Product.
Let us analyze the treatment to be given to each of the 4 stock categories mentioned.
High Value – Fast Moving
You must analyze the sales trends for these items and understand the average quantity sold per day. Based on this parameter, we should have stock in the warehouse equivalent to its lead time. For example, if the lead time for a High-Value product is 7 days, and per day sales are 100 quantities of this product, then there must be 700 quantities of this item in the warehouse at all times. This will ensure the inventory never runs out of this stock item.
High Value – Slow Moving
Since the value of such items is high while they do not sell much, the inventory team can consider ordering them only when required by the customer. It is also necessary to also analyze the ordering pattern for this kind of product by the customers. E.g., if a particularly high-value product is usually ordered in December by a set of customers. In that case, we should keep stock of such a product only for December to fulfill its demand.
Read more : 7 Basic Types of Inventory Costs and Examples
Another good strategy that can be followed for such stock items is the drop ship methodology. Drop ship methodology implies that instead of storing stocks within the warehouses, you directly ask your vendor to dispatch it at the customer’s location. This ensures you never have to bear the inventory holding or carrying charges for such stock items.
Low Value – Fast Moving
Since these stocks’ value is low, keeping them in stock will not hurt the costs much. But a good strategy would be to estimate their lead time, per day sales, and keep at least as much stock as is required till the lead time. This approach is similar to the one followed for High Value – Fast Moving. However, we can afford to have a little extra quantity that can act as a cushion for the sales team to up-sell or cross-sell.
Low Value – Slow Moving
This is the category that hurts the business the least, but depending on the nature of your business, this may be the most crucial category, as they can consist of spare parts required by machinery or items which are probably not available with any trader.
Many entrepreneurs often ignore this category and do not stock these items. A good strategy would be to estimate the yearly requirement of these stocks after analyzing the sales pattern for the last 4-5 years. Based on the analysis, maintain an average monthly stock level for these stock items. These are essential as it may help set a differentiating image of your business in competition to other businesses.
Volume of Stock Item
Businesses may classify their stocks into the above categories and understand their approach for their inventory. However, businesses must consider another aspect in addition to the above pointers, which is the volume of stock item.
Learn more : 5 Steps to Skyrocket Your Sales with Inventory Management
If the volume of any stock item lying in any of the above four categories is high, it would directly impact the inventory holding charges. They would require a bigger warehouse to store them. If such items fall in the first or the third category, you will need to follow multiple strategies to keep your inventory costs in check.
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