Stratify Your Inventory for Better Profitability
By Paul Byrnes
One of our goals as a buying group is to help our distributor members drive profitability; a distributor’s inventory strategy can have a big impact on their bottom line if managed proactively.
Distribution is often looked at in seven segments referred to as 7S – source, stock, sell, ship, supply chain planning and support services. Inventory stratification affects all seven categories, improving service levels, increasing sales and allowing you to grow in the space you are in without additional financial investment.
Because I have spent most of my career in the sales segment of the 7S, I can attest to the value of inventory stratification. I have lived with and without it and understand the pain of not having one – and know the success that having one helped deliver.
Let’s start with the basics of inventory stratification. Inventory stratification is the process of ranking items based on activity, profitability and maybe a few other measures to use for purchasing decisions to assist in right-sizing inventory. In other words, having enough of what you are good at and not too much of what you shouldn’t have.
There are several methods available. They all reflect what is known as the Pareto Principle or the 80/20 Rule. Your research will help you decide what is best for your organization.
Let’s consider, at a very high level, the three-category approach and label the categories A, B and C.
- Category A- ranked items are your strongest products. They are core to the customers you serve and could be described as what you want to do. They are items you want to provide.
- Category B- ranked items are part of the industry you serve but secondary to your customers and could be described by what you must do rather than what you want to do.
- Category C- ranked items are your weakest products. They are not core, and are seldom ordered, but you must have them though you wish you didn’t.
The goal of inventory stratification is right-sizing inventory and delivering increased results at both the sales and service level. This applies to what you do best and what is most important to your customers. A common outcome of an inventory stratification would be for A inventory to as much as double, B products to typically remain the same and C products to decrease dramatically. Typically, total overall inventory decreases and the decrease in the C or slow-moving items supports the increase of A, resulting in increased profitability and cash flow along with the potential for increased sales on your best items. There are several models and theories, but something this simple can deliver impressive results.
NetPlus Alliance partners with distributors and suppliers to drive profitability and growth throughout the channel. Learn more about the benefits of joining NetPlus Alliance.