Inventory management is a complex affair. It is also one of the reasons why most sellers shy away from stepping into the world of eCommerce. There are no doubts that inventory management requires a lot of efforts and technological support. But, it is totally worth it, when it comes to business profits. If you’re worried about managing your inventory effectively, it is time that you know about the 80/20 rule in inventory management.
It is important to understand the role of inventory in eCommerce. As an online seller, if you’re not paying attention to your inventory you’re probably losing out on a lot of business, without even realizing.
An Ordinary Inventory Scenario
If you don’t agree with this, let’s give you a real life scenario. Do you know what happens when one of your products goes out of stock on your website? Imagine that your most loyal customer lands on your website to purchase the same packet of lotion as always. As they open the products page, the message on the screen says ‘Out of Stock’. As a result of this the customer was not able to make a purchase on your website.
The next chain of activities is as follows. Disappointed by this experience of your online store, your customer performs a Google search of the product they can eot shop on your website. And Voila! They find another eCommerce store selling the same product with faster delivery options. Therefore, your loyal customer ends up purchasing the product from another store.
This affects your business in two ways-
- You lose an opportunity for a sale. This means that you could have sold a product to the customer and made profits out of the same. But, instead by being out of stock you lost the opportunity.
- You lose a customer. When a customer finds another interesting opportunity, the chances are very few that they will come back to shopping from your brand. Since the market competition is already fierce these days, it becomes nearly impossible to bring a customer you’ve already lost once.
New businesses are eager to provide customers with good options on a daily basis. Moreover, for the customer merely receiving reliable and low costs options is enough. This means that the sentiment that was once attached with your business has now shifted to an altogether new business due to lucrative offers from them.
Think it this way- what would you do if you had to choose between two brands. One that sold a product X for Rs 100 plus Rs 10 shipping. Or another brand that sold the same product X for Rs 100 but with free one day delivery. Obviously, you’d go with the latter brand, won’t you? This is how the difference is created!
So, it’s always better to put your best efforts in inventory management. Using the 80/20 method is a great option and it is what we’ll tell you in more details today. Read on to find our more.
What is the 80/20 Rule in Inventory Management?
The 80/20 rule inventory management, also known as the Pareto principle, was first used in microeconomics. It was proposed by Vilfredo Pareto and has ever since been used to describe a general scenario. The Pareto principle quintessentially established an 80/20 rule of causation.
the 80/20 rule in inventory management is the scientific principle that states 80% of output results from 20% of input for any event. Its goal is to identify the input that is most productive and hence to make them the priority. Although this principle is used mostly in business and economics, one can still apply it to any feel like finance, wealth distribution, etc. There are three ways in which the 80/20 rule in inventory management might be used to make the inventory efficient.
- 80% of your sales come from 20% of your product. For every business, there are products that generate more revenue than the rest of the products, which could be due to various reasons like problem-solving, durability, or pricing.
- 80% of your customers find interest in 20% of your offerings. A business has to launch numerous marketing campaigns to meet its revenue goal but not every marketing campaign has the same efficiency. Therefore, in some cases, it would be 20% of the marketing campaign that will bring 80% of the result.
- You use 80% of your storage space only on 20% of your offerings. Furthermore, based on the ABC analysis, warehouse managers can draw up plans to ramp up warehouse storage capacity.
The Classification of the 80/20 Rule in Inventory Management
The core principle is to identify the companies best assets and create its maximum value using them efficiently. For example, a student must try to identify the parts of the textbook, which will generate the most benefit for the forthcoming exam and focus on the first; however, this doesn’t mean that students should ignore the other parts of the test book.
Retailing the 80/20 rule is the key that enhances sales and margin performance and the cash deposit machines of the business, which also gives the company the h to trade competitively.
The 80/20 rule helps in high turnover, better profit, and cash flow, optimizing inventory for better growth. We can classify and apply the 80/20 rule in inventory management as follows-
In an inventory management strategy, the first area to look at is privatization. In general, you can make active decisions regarding the inventory flow of your most valuable products. It can help you to make informed decisions about where to place your time and money.
The A, B and C Technique
The second approach leads you to split the entry into three categories that is ABC. This is openly called as ABC analysis where the type A enlist the most valuable products. This consent to 20% of the total products. The category B lists the mid-level useful products, which are around 60%. The category C has least valuable or not moving products. About 20% of the products are kept low as possible. This is done to ensure that one can understand their importance and their place in the larger picture of the business.
The last approach is the suppliers. This refers to the one who is responsible for supplying the products. In the supply chain it is essential in managing the inventory as one relies on supplies to get the products you need. This might be regardless of the fact that they are final products or raw materials. The 80/20 rule in the inventory management process includes examining the inventory where the businessman looks at the most valuable products of the company.
Inventory Control Technique
The second step of the process is the ABC analysis, and inventory control technique in ABC analysis. A company reviews its inventory and sorts the items into three categories. Next comes the control techniques. In this, the company conducts an ABC analysis. It uses a device and inventory control strategy that focuses its efforts on where it will have the most significant effect. Items in an inventory are highly controlled and are watched closely. Moreover, the items that one finds in the list as less expensive can be ordered in bulk.
Should You Use the 80/20 Rule in Inventory Management?
The 80/20 rule in inventory management can drastically transform the outlook of your business. Right from being an inefficient process to helping become more transparent and well to do business, the 80/20 rule in inventory management can make all the difference. Several businesses use the 80/20 rule in inventory management across the world. Mostly the businesses that have higher costs and risk use this. But, it is also for small and medium sellers.
The Role of Shipping and Inventory
Shipping and inventory is a deadly combination in eCommerce. They have a huge impact on the seller as well as the customers. While you deploy the best practices for inventory management, it is also crucial to pay attention to your shipping strategy. In other words, your shipping strategy can make all the difference to your inventory.
It helps you deliver your inventory to your customer. In other words, it sets your inventory efforts to action. When you sort and organize your inventory, you want to deliver it the same way to the customer. A good logistics platform ensures that this happens adequately. For example, Dash101 is a shipping aggregator service that helps you make the most of your 80/20 rule in inventory management. It delivers your inventory efficiently to your customer at the lowest shipping rates in India. You can ship your orders to 26000+ pin codes and at the same time grow your business.
