Inventory Management Shortcut

Inventory can be one of the most difficult assets to manage. It doesn’t have to be this way if an inventory management shortcut is utilized.

The Problem

Let’s assume a company has 10 products in inventory as shown in the list below. I have added information to this list to help analyze it and sorted it in order from the highest value to the lowest.

inventory example for 80-20 rule

As you can see, there is far more on hand for most products than needed. If you look at the cumulative % of inventory value in the fifth column you will see that the first three items comprise 78% of the inventory value. Of course, I’ve deliberately created a fictitious list to illustrate a point. If, however, you were looking at an actual listing of inventory for a company you would likely have many more items and it is highly probable that 20% to 30% of your item numbers would comprise about 80% of your total inventory value.

What I’m driving at is that using the 80/20 rule can be a very useful inventory management shortcut tool for getting inventory under control. If you total them, you can also see that if only the first three items were addressed and reduced to the optimal level it would reduce the inventory value by $12,450, and that would reduce the total value of inventory by 57%. That is quite a reduction.

The Real Purpose

The 80/20 rule is just a tool and the actual percentages will vary. It could be that 10% of your items make up 90% of you inventory value or 40% make up 60% of the value. The purpose of using the rule is to help focus on the inventory items where the biggest impact can be made.

Like any inventory management shortcut the 80/20 rule is just one thing to help. Obviously there are other useful tactics such as better sales forecasting, improved inventory tracking methods, etc. Use whatever will help you reduce your inventory as close as possible to its optimal level. This will help reduce the probability of inventory write-downs of slow-selling items and write-offs of obsolete inventory.

Need help with implementing better inventory controls? AimCFO is ready to help by providing Part-time CFO or Controller services.

If you want to know more, contact AimCFO – Contact

As always, your comments are welcomed.

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