What Is the 80/20 Inventory Rule?March 18, 2020
In How SKU Count Affects Order Fulfillment, we discussed the importance of having a good SKU system in place to determine which items to invest in and which to discontinue. We suggested using the 80/20 rule, which in the fulfillment industry means prioritizing the top 20 percent of the products that generate 80 percent of your sales. When managing inventory, identifying those SKUs or products allows you to place them in an easy to reach area, which will save you time, money and improve your fulfillment efficiencies.
What are some of the other benefits of the 80/20 rule? Here are three:
1. The 80/20 Rule to Save Space
While it’s important for retailers to have a wide range of products available for customers, following the 80/20 rule can help you offset the space and time lost to high SKU volume.
That’s because you don’t have to stock the same amount of inventory for every SKU. Instead, focus on carrying high quantities of your top-selling products while minimizing the rest of your slow-moving inventory.
2. The 80/20 Rule for Efficiency
The 80/20 rule also makes your inventory management more efficient. If you have identified 20 percent of the items driving 80 percent of your sales, you can easily optimize your re-ordering process.
Let’s say you are running low on two products: one is from a top performing category while the other is from a group that generates a lower amount of sales. Applying the 80/20 rules makes it easier to choose which item to re-order first. You’ll want to prioritize the SKUs that are most in demand.
This is also known as the ABC Method, which ranks inventory based on revenue. Your top 20 percent would be assigned to Category A while your lower performing products would fall into Category C. Class B products could be your more middle-of-the-road performers. Your products from Category A should always be your top priority.
3. The 80/20 Rule to Save Money
The 80/20 rules is also an effective way to measure which products are the least beneficial to your business. Should you be spending money producing and marketing items that are just taking up space in your warehouse? Maybe it’s time you give some products the heave-ho. You could focus your efforts on trying new products and SKUs instead, or making your existing hits even better. After all, the 80/20 rule is a direct reflection of what your customers’ are consuming and what’s working for your business.
The biggest benefits to the 80/20 rule is that it gives you an unbiased assessment of product performance so you can allot your effort, money and space to the right items. Use it to draw useful insights to make decisions that positively impact your bottom line.