You have probably come across the ABC inventory analysis called often the 80/20 rule or sometimes the Pareto Principle.
What it is, is that no matter what you measure, website hits, advertising expenditure, pilot kills in war, shop sales, political influence, etc. It all seems to come down to something like this that somewhere about 20% of the total gives about 80% of the results.
So everyone wants to find the 20% because that is giving almost all the results.
* 20% of your customers will bring you 80% of your business
* 20% of your products will bring you 80% of your business
* 20% of your staff give you 80%
* 20% of your advertising gives you 80% of the results.
* 20% of the shop fittings give you 80% of your business
And so.
Now in inventory control, the ABC method identifies this and divide all your stock into three groups.
The first we call the category A-lines. They are the most valuable stock items you have. These are 20% of your lines that give you your 80% sales and profits.
We then have the category B lines. They do pay for themselves but not a lot. As a rule, they are about 30% of your lines and account for about 20% of your sales and profit.
Finally, we have the category C lines, which typically are about 50% of your stock lines and give about 5% of your sales and profit. They also usually take up most of the shop's funds.
Now the idea of the ABC stock control method is to identify your A, B and C items and then
* A lines should be monitored all the time. You do not want any out of stock situations with them.
* Your C-lines should be pruned if possible if they must be kept then, reduce the stock holding on them
* Your B-lines do pay their way, but you would not go out and order a lot.
Now if you go to stock reports > select stock N sales for a given period, choose now as a number of items 30,000 as we want every item.
Now run this report with a decent period. I would suggest running the report by profit, but this may depend on your business philosophy as some may prefer a number of units sold.
Now the first two pages of the report will be your A-lines, on those you need to concentrate.
The last 80% of the pages, you should ask yourself, do I need these lines?
I did some reports recently for one of our clients a lottery agency, and I used excel to produce some graphs that will show you I think quite dramatically how it works as it makes interesting reading. They had in the shop 21,000 stock lines.
The number of sales ranked in order of top selling lines here.
50% of the sales came from 45 stock lines about 0.21% of the stock lines
80% of the sales came from 4615 lines approximately 21.76% of the stock lines
Here is the profit percentage by stock lines
20% of the profit was from 135 about 0.64% of the stock lines
50% of the profits came from 1,873 about 9.35% of the stock lines
80% of the profits came from 7,374 approximately 34.78% of the stock lines
See how you go and as always let me know if you find something interesting.
