For a business to succeed, the inventory strategy must align with the overall corporate vision of the organisation. However, when it comes to executing the supply chain strategy, even seemingly small inventory management decisions can have a profound and far-reaching impact across the rest of the organisation.
As a result, it’s vital that supply chain planners have the level of insight and control required to execute supply chain tasks effectively. Put simply, without the right tools, technology, and knowledge in place, businesses simply cannot make optimal inventory decisions.
This is a tool, to be used, before even thinking of introducing a new product. Firstly, management should look at their own business and decide upon a few criteria, which are important for the introduction of a new product. This could be expected Sales (in $ or pieces), Gross Margin (in $) but also alternatives (we have already 25 similar products, why introduce number. 26), existing or new supplier, uniqueness etc. Every alternative is assigned a number of points to express importance. If we consider margin more important than uniqueness, we give more points to margin. The total number of points should be 100.
The next thing is assigning values to each parameter which tells us if the parameter scores points. Sales contributes e.g. 20 points if Expected sales is over $100,000 per year and nothing if expected sales are less. At the end, we calculate the total score. If the score is less than 40 points, we do not introduce the product, if the score is over 70 points, we do. And if the score is between 40 and 70, we re-evaluate. Of course, many of the parameters and especially the scores and thresholds are subjective. But the process is more important. We have been told that using this tool, the number of introductions went down by 70%! And this is very useful because the marketing company Nielsen stated that 90% of product introductions failed! This does not mean we should not introduce new items. But we should take a calculated risk.
The assortment-index can also be used for an existing assortment. Using the tool for this purpose has led to some very interesting results. A distributor of snack-food used the tool for introducing reasons but also for evaluating the existing portfolio. The Management defined parameter and values, and used a counter-program to evaluate all his 8,000 SKUs.
The staggering result was that they should phase out 5,000 SKUs. So, the practice did not reflect the Management’s ambition or goals of the company. After an internal struggle they phased out 3,000 products.
We give an example of an assortment index for an item.
Columns 1,2 and 3 are criterion set by Management. The score in column 4 was a mix of forecast (e.g. Sales) and practice. But this could also be used for the existing portfolio in which all the data in column ‘score’ are historical data.
|
Criterion |
Limit |
Weight |
Score |
Index Score |
|
Sales |
>$10,000 |
20 |
$4,000 |
0 |
|
Gross Margin |
20% |
10 |
35% |
10 |
|
Net Margin |
>10% |
10 |
8% |
0 |
|
# customers |
>10/yr |
20 |
33 |
20 |
|
# orders |
>50/yr |
5 |
34 |
0 |
|
Traffic |
Yes |
10 |
No |
0 |
|
Alternatives |
<5 |
10 |
15 |
0 |
|
Earn x Turn |
>120% |
10 |
80% |
0 |
|
Supplier |
Top 50 |
5 |
No |
0 |
|
Total |
|
100 |
|
30 |
|
• Score < 40 |
Not to be introduced / Non Stocked |
|
• 40 < Score < 70 |
Re-evaluate |
|
• Score > 70 |
Introduce / Stocked |
As shown in the table above, looking at the total index score (30) the item should not be introduced or put it as non-stocked.
In Part 2 of our series, we will be looking at ABC/XYZ Analysis. Please do subscribe to our blog if you would like to receive the latest posts about Inventory Planning and Optimisation.
Let us help reach your inventory planning goals to get the right stock at the right place and at the right time. To learn more, please visit https://www.slimstock.com/sg/ for more information or contact Erik at e.dewitte@slimstock.com.