December 11th, 2020

3 Common Inventory Management ‘Sins’—And How to Avoid Them

3 Common Inventory Management ‘Sins’—And How to Avoid Them

ARTICLE SUMMARY Three rules are really important in inventory management. If you don’t get them right, you won’t be able to do a lot of other things. They are: 1) Observe ABC Classification It has long been shown that 20 percent of lines account for 80 percent of revenue and margin. These are the A-lines and should be prioritised in the warehouse. The B-lines and C-lines contribute less to revenue so they should not be treated in the same way as the A-lines. 2) Forecast Demand If you fail to forecast demand, you face the following potential risks: Running out of stockExcess inventoryObsolescence expenseHidden costs. 3) Draft an Inventory Policy If you don’t have an inventory policy: 1) You won’t get consensus 2) Cause and effect will be hard to pin down 3) Systems can’t be set up 4) Comparisons will be impossible. Three rules are really important in inventory management. If you don’t get them right, you won’t be able to do a lot of other things. They are foundations in a way. Let’s examine each one in turn, likening it to commandment that shall free you from inventory-management sin. Commandment #1: Thou Shalt Observe ABC Classification It has long been shown that 20 percent of lines account for 80 percent of revenue and margin. In a Supply Chain Secrets  YouTube video, Kieran Hogan says he has been in the industry pretty much his entire working life and hasn’t seen any place yet where this rule—or something close to it— doesn’t apply. An example from a company that turned to Kieran for help in cutting its costs and streamlining its warehousing operations will aid in illustrating this maxim. Let’s call it Company Z. Company Z has a total of 7,029 lines with a turnover of about $51 million (see diagram above). We can break these down as follows: 1) A-lines—Turnover $41m (80 percent of total turnover). Number of lines 1,125. Percentage of lines 16% 2) B-lines—Turnover $7.69m (15 percent of total). Number of lines 1,825. Percentage of lines 26% 3) C-lines—Turnover $2.5m (5 percent of total). Number of lines 4,052. Percentage of lines 58%. As we work down the lines we see an ever-decreasing contribution to revenue. So if you want to know where to go, where the effort belongs, it’s obviously the A lines. Let’s look at an example. Imagine you are a racehorse owner and have...

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