Applying the 80/20 Rule to Your Inventory
from Trent Hamm
I’m a big believer in the 80/20 rule. Over and over again in life, I’ve seen it pop up in various contexts, and focusing in on applying that rule has led directly to success. In the next few weeks, I’m going to look deeply at the 80/20 rule here on OPEN Forum and attempt to apply it to various aspects of small business practice.
What is the 80/20 rule? The 80/20 rule, also known as the Pareto principle, simply means that roughly 80 percent of the effects of anything you might be doing come from 20 percent of the causes. For example, 80 percent of your sales are likely generated by about 20 percent of the items you carry or services you offer.
Unsurprisingly, this simple little principle gives great insight into how your business works and also offers some pointers on how to manage your business better. Let’s look at three ways the 80/20 rule might be applied to make your inventory more efficient.
80 percent of your sales come from 20 percent of your products. What products sell consistently for you? Run the numbers and figure out what your best sellers are. Then, make sure that you maintain a good supply of those products. It’s far more important to keep the big 20 percent of your products in stock than it is to keep the other 80 percent in stock because 80 percent of your sales come from that small 20 percent. Worry when you run low on the big sellers and prevent that from happening; don’t sweat it when you begin to run low on the other items.
80 percent of your customers are only interested in 20 percent of your offerings. Once you’ve positively identified what your key offerings are, make sure that those products are prominently displayed and available for customers. Make these purchases simple and convenient for your customers and you’ll find that they’re happier and happier with your service — and more likely to refer your business to their family and friends.
80 percent of your storage space is used on only 20 percent of your offerings. If you find that you’re having storage issues, look at what you’re actually storing. How much of your space is taken up with stuff that is in that 80 percent of stuff that doesn’t sell very well? If you want to maximize the value of your storage space, minimize the space used for the stuff you rarely sell and maximize the space used by the stuff you frequently sell. For many businesses, this can often mean less storage space and perhaps more floor space or lower costs in exchange.
In short, figure out your best sellers, keep them in stock and prominently displayed, and jettison large items that rarely sell. Each one of those options either directly reduces costs without reducing income by much or has the potential to increase sales without a dime of additional spending. Remember, keeping the 80 percent happy is your bread and butter.