Why Stratify
For small businesses and e-commerce companies, inventory is a significant asset and a major drain on working capital if not managed properly. Inventory stratification is a strategic practice that enables these companies to manage their product life cycles, optimize working capital, and plan cycle counts efficiently. It's a method of prioritizing inventory based on its value and importance, often using the Pareto Principle (80/20 rule), so you're not treating every product the same.Managing the Product Life Cycle
Every product has a life cycle: introduction, growth, maturity, and decline. Stratification helps businesses align their inventory management with a product’s current stage. For example:
Introduction: A new product is often a "C" item initially. Its demand is uncertain, so you should keep stock levels low to test the market and minimize risk.
Growth: As a product gains popularity, it might quickly become an "A" item. You can increase stock levels and allocate more resources to it to meet rising demand and avoid stockouts.
Maturity: A product in this stage is likely a stable "A" item. You can use its predictable sales data to implement more precise forecasting and lean inventory practices, like just-in-time (JIT) ordering, to reduce holding costs.
Decline: When a product's sales volume decreases, it can be reclassified from an "A" to a "B" or "C" item. This signals that it's time to reduce safety stock and liquidate or markdown remaining inventory to free up capital and warehouse space.
By continuously stratifying your inventory, you can proactively manage each product's journey, avoiding the financial pitfalls of overstocking items in decline or understocking popular products.
Optimizing Working Capital
Working capital—the cash available for day-to-day operations—is a lifeline for small businesses. A common mistake is tying up too much capital in slow-moving or obsolete inventory. Stratification directly addresses this by freeing up cash for other critical business functions like marketing or product development.Prioritized Investment: The core of stratification is putting your money where it matters most. By identifying "A" items, you can ensure you have sufficient stock of your top-selling, high-profit products. For "C" items, which contribute little to your revenue but take up the most physical space, you can maintain minimal stock levels and reorder less frequently.
Reduced Carrying Costs: Overstocking leads to high carrying costs, including storage, insurance, and the risk of obsolescence. Stratification allows you to reduce inventory for lower-value items, thus lowering these costs and improving your profit margins.
Improved Cash Flow: By avoiding excess inventory, you shorten the time it takes to convert your inventory into cash. This improved cash flow is crucial for covering operational expenses, managing unexpected costs, and seizing growth opportunities without needing external financing.
Planning Efficient Cycle Counts
Traditional annual physical inventory counts are disruptive and labor-intensive, often requiring a full warehouse shutdown. Stratification enables a smarter, more efficient alternative: cycle counting.Targeted Accuracy: Instead of counting everything at once, you can create a cycle count schedule based on your inventory classification.
"A" items are counted most frequently (e.g., weekly or monthly) because their high value means discrepancies have a larger financial impact.
"B" items are counted less often (e.g., quarterly).
"C" items might only be counted once or twice a year.
Data-Driven Decisions: This targeted approach ensures that your most valuable inventory data is the most accurate, allowing you to catch errors early and minimize financial risk. It also gives you a deeper understanding of your inventory's movement and where discrepancies originate.
Continuous Improvement: Cycle counting as part of a stratification strategy is not just about accuracy; it's a continuous process of improvement. It allows you to audit your processes in real time and address the root causes of inventory errors, whether they stem from poor receiving, picking, or transactional issues.
By implementing inventory stratification, small businesses and e-commerce companies can transform their inventory management from a static, reactive process into a dynamic, data-driven strategy that supports profitability, improves cash flow, and drives sustainable growth.
