Inventory Classification Basics: How to Organize your Inventory
The heart of any retailer’s business comes down to its inventory. When inventory is flying off the shelves, you’re doing well. When it isn’t, you’ve got some challenges on your hands.
The good news? Those challenges are preventable.
With the right approach to inventory classification, you can strengthen your sales and simplify how you pinpoint which products are popular and should be restocked, and which aren’t selling at full-price and should be liquidated.
Keep reading to get the scoop on the basics of inventory classification.
1. Organize your retail inventory into unique categories
What differentiates one product from another?
Let’s say you’re a fashion and apparel retailer. Rather than classify all your t-shirts under one umbrella category like “t-shirts”, it’s best to classify all your t-shirts by their unique characteristics like the following:
Why should you use unique inventory categories?
By categorizing similar products by their unique traits in your POS back end, you’re able to zone in on exactly what kind of t-shirts are your best-sellers, and which aren’t. This enables you to further classify your stock into an A-B-C classification (but we’ll get to that a little later).
Unique categories are your friend when it comes to reordering inventory. Instead of scanning through a ton of data, you can easily filter your sales reports and see exactly which types of t-shirts sell best. What size, color, fit, and brand sold best? Armed with that intel, you can maximize your next purchase order’s return on investment.
2. Classify your retail inventory by dollar-usage
In addition to creating unique categories to classify your inventory, you might want to consider A-B-C inventory classification, which states that not all of your inventory is of equal value.
According to A-B-C classification, you should group products based on their estimated importance to your business. For most companies, that looks something like this:
- A inventory: accounts for about 20% of the items in your inventory and makes up 80% of your annual sales volume.
- B inventory: accounts for about 30% of the items in your inventory and makes up 15% of your annual sales volume.
- C inventory: accounts for about 5% of the items in your inventory and makes up 5% of your annual sales volume.
The A-B-C classification model is similar to the Pareto principle (the 80/20 principle) in that it states that 80% of your sales come from only 20% of your inventory. The reason this type of classification is useful is that it gives you an easy-to-read overview of which product SKUs are the most important for your business.
Once you know which product categories are selling the most, you can classify them into an A-B-C structure to concretely know what is driving the most revenue for your store. Always prioritize restocking your A and B inventory, as that’s what’s accounting for the majority of your sales.
3. Put your categories and sub-categories to work
The main benefit of setting up unique product categories in your POS system is that you can quickly get insight into which categories are the most popular with your customers. With easy-to-read, in-depth sales reports that give you a breakdown of your sales data by day, week, month or year, you can see which categories are selling the most, which ultimately enables you to order inventory that (based on historical sales data) has a high probability of selling.
Remember, your inventory is essentially a placeholder for your money. If you invest in a product that doesn’t sell, you’re not making any return on that investment and are essentially losing money. Being able to predict which inventory has a high probability of selling based on empirical sales data is an invaluable resource that helps you maximize your inventory’s ROI.
Retail organization and ROI are directly linked
While buying stock based on what you think will sell is one approach (one that relies a lot on instinct, we might add), the best way to increase the probability that you sell your products full price is to:
- Use unique categories and sub-categories to organize your inventory
- Analyze your sales by product and sub-category to determine where you should re-invest
In doing so, you’re setting yourself up for success by staying organized and assuring that your sales data is as clean and accurate as possible.