Managing inventory categories

Roger OakdenGlobal Logistics

Know your inventory.

What is critical for logisticians? One issue is how to format finished goods SKUs into a meaningful structure.
This will help you to understand inventory and therefore manage it in a more professional way.

This blog is Part 3 of a discussion about managing your inventory. Previously, I introduced the coefficient of variation management  (CoVM) model, developed by Tom Rafferty of Supply Chain STO. The model provides a structure to identify each of your SKUs by its category and each is managed in a way that suits how that category behaves.

The basis of the model is that SKUs with a low CoV experience low variability of sales and those with a higher CoV are progressively more variable in their sales performance. The CoV calculation was discussed in Part 2.

For the basic CoVM model, the SKUs by CoV are placed in a matrix by group/class, commencing with Aa in the top left-hand cell, then across the horizontal line enter group/class Ab, Ac, Ad and Ae. This is followed on the next line by Ba, Bc and so on. You will end with 20 active group/class cells, plus an additional row to represent ‘dead’ inventory (those SKUs for which no demand has occurred in the past 12 months).

For managing inventory, divide the matrix of cells into five categories. The grouping of SKUs into categories is conditioned first by the CoV class and second by the class’s volume group.

Use categories to manage your inventory

All SKU in ‘class a’ will be in the STEADY category. These have a steady demand, with little variation, regardless of volume. Their performance can be tracked using a low tracking signal of about 4 for forecast control. The VARIABLE category addresses classes ‘b and c’ in groups ‘A and B’. This category requires intensive management, identifying different customer service levels or safety factors by SKU, especially for Ac and Bc. Group/class Ad and Ae are the ERRATIC category; individual SKUs can have high sales but an erratic pattern. This requires logistics and sales to work closely, so that causes of volatility can be identified and corrected.

The remaining categories are together known as SLOB stock, that is Slow (no demand in the past 6 months) and Obsolete; these are SKUs that consume a lot of warehouse space and cost money to manage. The category called IRREGULAR includes SKUs in cells Cb, Cc, Cd and Bd; they experience low sales on an irregular basis. The number of SKUs in this category can equal the total number in the top three categories. This category requires differing supply methods; change the customer service levels, contract production to a smaller company, if imported, review minimum order quantities and gross margins.

The LUMPY category can contain up to 70 percent of all SKUs, yet only provide 5 – 7 percent of sales, which makes this category the target for product rationalisation. This is difficult to achieve, because marketing will continue to push for release of new products and the sales department require a full product range to enable sales of more popular SKUs. DEAD stock comprises SKUs that have not moved in the past 12 months and should be written down and sold off, except if they are ‘insurance’ service parts.

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About the Author

Roger Oakden

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With my background as a practitioner, consultant and educator, I am uniquely qualified to provide practical learning in supply chains and logistics. I have co-authored a book on these subjects, published by McGraw-Hill. As the program Manager at RMIT University in Melbourne, Australia, I developed and presented the largest supply chain post-graduate program in the Asia Pacific region, with centres in Melbourne, Singapore and Hong Kong. Read More...