5 Steps to Optimise Your Inventory: Step 3 - How to Classify Your Products & Define Your Strategy By Peter Clarke At Isnare.com Ezine Articles

To optimise your inventory, you need to know what you have, decide how best to move it around, and find out how well you are doing it.

Step 2 in the Inventory Optimisation series - analysing your inventory performance - is difficult enough considering the many variables that have to be considered. But analysing your inventory performance, let alone good inventory management overall, is made more complicated by the range of stock-keeping units (SKUs) that are involved. It would be simpler - in every respect - if you only had one item to keep track of. But some industry inventories encompass hundreds, thousands or even hundreds of thousands of different objects, and each needs to be taken into account. Size, number, difficulty of storing and shipping, priority - all have different values.

But you shouldn't have to worry equally about all of them. The Pareto principle says that 80 per cent of your work revolves around 20 per cent of the items. This means that some items are more important than others, particularly as some are shifted more frequently in higher numbers than others.

Each product line or SKU has to be treated differently. This means that your next step in optimising inventory is to classify your products and define your strategy. The whole purpose of this step is to help you focus on the items that are the most important, and let the system handle the less important ones more-or-less automatically. Typical classifications you can use for products include:

• High/slow movers
• High/low values
• Long/short lead-time
• Strategic/not strategic products
• Profitable/not profitable
• Bulky/non-bulky products
• Dangerous goods

Products can also be cross-classified by where they sit in the supply chain and what priority they have:

• Item and warehouse
• Item group
• Supplier
• High or low volume
• High or low frequency
• Strategic
• Base default

Once products are classified, you can develop a strategy for each product segment. You will need to base this on a range of decisions, such as what should be kept in stock, what items you should focus on and what inventory policies should be used so that you can calculate the forecasts that ensure the best service level and order quantities. Product segments (as opposed to individual product items or SKUs) can be used as the basis for policy and strategy development, as this increases efficiency.

Typical questions that need to be asked when defining strategy per product segment include:

• What do we keep in stock that we shouldn't?
• What items shall we focus on, to make the greatest impact?
• What inventory policy to use in order to calculate forecast, get optimal service level, order quantity, safety stock?

This combination of classifying and developing a relevant strategy allows you to impose different rules for different segments. It also means you should be able to simulate the effect of such actions. You should also be able to simulate and adopt more advanced calculation rules for strategic item segments. Doing this, you are constantly improving performance over time while making sure that the focus is maintained where it matters.
This is a complex procedure.

You will need a system that will accurately and quickly produce exception reports for review and auto-adjust for variances across a large number of products. It should calculate proper safety stock levels, determine economic order and best discount quantities. It will automatically get the right products to maximise line buy minimums. And, importantly, it should provide complete visibility of changes throughout the supply chain, from manufacturing through to end consumer.

This will allow you to make quick reactions to changes in the supply and demand, service your customers in pre-determined priority sequences, set service levels based on sound financial judgment, invest in inventory that will maximise returns and analyse and react to exceptions and reduce dead inventory.

The result is a fully - or at the very least largely - automated system that reacts to changes in the operating environment using pre-set priorities and data. This will help you make clear decisions rather than confuse you with complexity.

In other words, the result is an end to the sort of seat-of-the-pants decision-making that often proves at best to be costly, or at worst to be disastrous.Once you have analysed your performance, classified your inventory and set appropriate strategies, the next step is use the information you've gathered and the control you've put in place to calculate your forecasts - the basis for action in optimising inventory.

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