How to Stratify
Stratifying inventory based on sales volume is a critical practice for optimizing warehouse management and improving operational efficiency. This process, often rooted in the Pareto Principle, helps businesses focus their resources on the products that matter most. By classifying inventory, you can make informed decisions about storage, reordering, and customer service levels.
The Foundation: ABC Analysis
The most common method for inventory stratification is ABC analysis. This technique classifies inventory items into three categories based on their contribution to total sales volume or value. The goal is to identify the vital few (A items) from the trivial many (C items).
Steps to Perform ABC Analysis:
Gather Data: Begin by compiling a list of all your inventory items. For each item, you will need two key pieces of data: the annual sales volume (units sold per year) and the unit cost.
Calculate Annual Consumption Value: For each item, multiply its annual sales volume by its unit cost. This provides the annual consumption value—the total value of that item sold over the year.
Sort the Data: Arrange your entire inventory list in descending order based on the calculated annual consumption value, from highest to lowest.
Calculate Cumulative Percentage: Calculate the cumulative percentage of both the annual consumption value and the number of items. This involves adding the consumption values and item counts sequentially down your sorted list.
Assign Categories: Based on the cumulative percentages, assign each item to an A, B, or C category. A common guideline is:
A Items (Red): The top 70-80% of the cumulative consumption value, typically making up 10-20% of the total number of items. These are your high-value products that require close management and frequent review.
B Items (Green): The next 15-20% of the cumulative consumption value, generally representing about 30% of the total items. These items are of medium value and importance.
C Items (Blue): The remaining 5-10% of the cumulative consumption value, which comprises 50-60% of the total items. These are low-value products that can be managed with simpler control systems.
Why Stratify? The Benefits
Stratifying your inventory provides several strategic advantages:
Optimized Resource Allocation: By identifying your A items, you can allocate more resources—such as time, capital, and labor—to managing them. This ensures you never run out of your most profitable products.
Improved Forecasting: A items, with their high sales volume, are often easier to forecast accurately. Focusing forecasting efforts on these items leads to more precise stock levels.
Efficient Warehouse Layout: You can design your warehouse layout to place A items in the most accessible locations, reducing travel time and improving picking efficiency. The use of a warehouse heat map can visually represent this, with A items (red) in high-traffic zones, B items (green) in intermediate zones, and C items (blue) in less-trafficked areas. Empty spaces can be marked in white, allowing for quick identification of available storage.
Smarter Cycle Counting: Cycle counting is a method of physical inventory auditing. Stratification allows you to implement a targeted counting schedule: A items are counted most frequently (e.g., weekly), B items less often (e.g., monthly), and C items only a few times per year. This saves labor and minimizes disruption.
Beyond the Basics: Other Considerations
While ABC analysis based on sales volume is a powerful starting point, other factors can refine your stratification strategy. Consider:
Seasonality: An item’s sales volume might fluctuate throughout the year. Incorporating seasonality into your analysis helps prevent stockouts during peak demand.
Coefficient of Variation (CV): This statistical measure, which is the standard deviation of demand divided by the average demand, helps identify items with highly volatile sales. Items with a high CV may require a larger safety stock regardless of their ABC classification.
Slob Inventory: Stratification can help identify Slob (Slow-moving, Obsolete, Broken) inventory. These items take up valuable space and can be addressed through markdowns, disposal, or liquidation.
By systematically sorting and classifying your inventory data, you move from reactive inventory management to a proactive, data-driven approach. This not only improves efficiency but also directly impacts profitability and customer satisfaction.
