How to Reduce Inventory and Increase Cash flow for your eCommerce Business
Every business is concerned with cash flow. Inventory is always an expensive proposition and ties up a lot of capital and cash flow. This article explores how to manage that investment.
The 80-20 Rule
The 80-20 rule is rule of thumb that applies to many processes, it is also known as the Pareto Principal. Pareto noticed that 80% of the wealth was controlled by 20% of the people. Since then, this rule has been applied to many processes including inventory control. It is typically true that 20% of your inventory items will account for 80% of your inventory cost. We can use this assumption to our benefit by being able to tightly manage a small portion of our inventory and get the greatest return on our time invested.
The A-B-C’s of Inventory Control
One of the simplest ways to begin to manage your inventory is to divide your inventory into “A- Items”, “B-Items” and “C-Items”.
A items are the top 20% of items by value that you inventory.
C-Items are the bottom 50% or so of items that account for less than 5% of inventory value.
B items are the rest in between the top 20% and the bottom 5% of SKU’s (Stocking Units).
How to determine ABC’s
An item’s inventory value can be calculated by multiplying:
Annual Quantity Sales X item cost = Annual Inventory Value
The best way to accomplish this analysis is to put your SKU’s in a spreadsheet with the variables: Quantity, Item Cost and Annual inventory Value. You simply multiply the columns and then use the spreadsheet’s sorting capability to sort the table on annual inventory value.
Next, add a column “Cumulative inventory cost” where you sum up the total cost of items one a time plus the items above it in the list. When you get down to 80% of the total inventory cost, these are your A items. Do the same process from the bottom of the list where 95-100% of the cumulative cost is. These are your C items. The rest are B items.
Putting the ABC’s into practice.
Now that you have categorized your inventory, you can begin to apply rules to each category. In last month’s article we talked about Economic Order Quantity, stocking levels and safety stock. For your A items, you may want to really reduce the safety stock and say that you’ll try to fill 80% of orders from stock for A items. In contrast, you can stock a whole year’s worth of C items with little impact on your overall inventory value.
Spend your time managing the A items tightly and try and minimize re-orders on the C items.
This is a great strategy to get your inventory under control and start increasing your cash flow and increasing your ROI on inventory investment.
We Can Help!
Dare Marketing provides order fulfillment solutions to ecommerce retailers. We’ve got the experience and the systems to help you take, fill and ship orders to your customers. Plus, we can help you do it cost effectively. For a review of your current fulfillment practices, or inquires about new ecommerce fulfilment project, please contact us.