Inventory types & classifications: Examples, benefits, and best practices
For growing businesses, efficiently utilizing inventory is necessary for controlling costs and protecting margins. This starts with properly classifying your inventory so you can make better decisions about inventory management. Each category plays a critical role in the supply chain, and managing them effectively is key to operational efficiency and cost control. Classify Inventory Items – Once the data is collected, classify inventory items into A, B, and C categories based on their importance. This can be done by considering factors such as cost, demand variability, lead time, and criticality to operations.
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Seasonal trends, market changes, and other factors can shift your categories over time. That’s why it’s important to review and update your ABC analysis regularly. You’ll need information on each item’s annual usage (how many units you sell) and unit cost (how much each unit costs).
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Try it out today and experience the ease and efficiency it brings to your supply chain operations. They’ve been manufactured from your raw material, passed inspection, and are waiting for your customers to purchase them. For accounting purposes, finished goods are combined with raw inventory classification materials and WIP inventory to make up the total inventory line item on a balance sheet. If you were a bicycle manufacturer, the complete bikes would fit into finished goods. Classifying items as A,B, or C involves a few calculations to identify cutoff points and ends with identifying the 20% of your stock that produces 80% of your revenue, or margin.
Cumulative Percentage of Total Inventory
These are the high-priority items that drive a significant portion of your sales. This classification aids managers in prioritizing and monitoring high-value items effectively. Lightspeed is a cloud-based commerce platform powering small and medium-sized businesses in over 100 countries around the world. Cycle count your Group A inventory regularly to assure you stay as close to 100% accuracy as possible. Remember, that’s the inventory that accounts for 80% of your total revenue. In any case, you’ll need to balance your inventory on hand and the inventory levels registered in your point of sale system.
Great for artists, galleries, and collectors, this inventory template provides a streamlined way to track artworks. With fields for titles, dimensions, mediums, pricing, and locations, it’s ideal for organizing art inventories for personal collections or professional galleries. Perfect for retail, this template has multiple tabs to track your current inventory, daily sales, and sales report. I love that it keeps all of this information in the same template, encouraging you to keep up with regular inventory tracking. Now that we’ve unpacked what an inventory list is, we can explore how it helps your business.
- Inventory accounting assigns values to all the items in the three stages and prepares them for sale.
- In business, the inventory may be defined as the goods held for sale in the ordinary course of business or the goods that are used to manufacture goods to be sold.
- Choosing an inventory management strategy depends on the industry you operate in.
- Outside of ABC Analysis which we mentioned above there are a few other classification methods worth mentioning.
- Accurate cycle counts are difficult to execute without effective warehouse operations.
Data Collection:
- Seasonal trends, market changes, and other factors can shift your categories over time.
- Save valuable time and effort by utilizing SCMDOJO’s ready-made ABC Analysis tool.
- This may involve implementing reorder points, setting up automated reordering systems, or even dedicating specific personnel to manage these items.
- Consider various factors, such as cost, demand variability, and lead time, to ensure accurate categorization.
- It offers fields for recording the quantity and condition of items, organizing them by different rooms.
Class A items typically have high demand, high unit value, and low inventory turnover. Class B items have moderate demand, moderate unit value, and moderate inventory turnover. Class C items have low demand, low unit value, and high inventory turnover. Pareto noticed that this 80/20 distribution was present in many other areas of life and coined the term “Pareto principle” to describe it.
Dr. Muddassir has received a PhD in Management Science from Lancaster University Management School. So, for each SKU, you’ll plug in the revenue it brings in and divide it by your total revenue. When everyone knows where certain products are located, it makes replenishing shelves, counting and selling inventory much easier. Outside of ABC Analysis which we mentioned above there are a few other classification methods worth mentioning. QuickBooks Enterprise has all the tools you need to manage your inventory profitably, such as mobile barcode scanning, real-time tracking, and custom reporting.
Raw materials are the basic, unprocessed materials used to produce finished goods or intermediate products in a manufacturing process. Inventory refers to the goods, materials, and products a business owns that are intended for sale to customers or used in the production process. Monitoring and Review – Use the software to monitor and review the effectiveness of the ABC inventory management system. Regular reports and analytics will help identify areas for improvement. Category C inventory is the other half your stock, which accounts for just 5% of your profits. These items are still part of your business, but they’re not as critical as the more profitable half of your inventory.
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You can apply the same procedure to inventory belonging to group B and C, but with less frequent cycle counts. When combined, both groups account for 80% of your inventory on hand. For most retailers, cycle counting that much inventory on a weekly basis simply isn’t feasible.
Why is the ABC classification of inventory important?
Fortunately, classifying your stock into the proper categories can help you make data-driven decisions and mitigate the risks of stock outs as well as overstock. What stood out most is how something as simple as an inventory list can drive better decisions and smoother operations. It’s a reminder that the small, consistent actions we take have a big impact on long-term success. Use clear descriptions and standard measurements to avoid confusion.