For entrepreneurs, managing stock is everything. Without insight into what is selling well and why you won’t be able to tweak your processes to maximise your profits. As a result, the company’s bottom line may take a substantial hit, leaving you in a tricky position. Considering that 80% of businesses fail in any circumstance, there’s no reason to make your job harder than it already is. Thankfully, the 80/20 rule is on hand to guide you through what can be a confusing and complicated area of the firm – inventory. Understanding how to implement it correctly will provide extra control, something that all bosses yearn for.
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What Is the 80/20 Rule for Inventory?
If you aren’t aware, the 80/20 rule for inventory is a take on the Pareto Principle. This theory states that 80% of effects come from 20% of causes, which means that different aspects of your organisation aren’t created equally. From an inventory perspective, it simply means that four-fifths of the company’s profits will come from around one-fifth of your inventory. That’s how essential it is to the sustained success of the firm.
The inventory management rule is just as crucial because it hands you the tools to prioritise your most lucrative items. For instance, not only does it help you to find which products and services are the most profitable, but it then lets you track them more easily to prevent them from going out of stock.
The Advantages of the 80/20 Rule
You’ll be glad to hear that there are more benefits to the rule than meet the eye. Here are three side-effects business owners experience when they implement the procedure into their plans.
Cutting costs is always essential as startups and SMEs have relatively low budgets. On average, companies have around £5,000 to spend, which isn’t a lot. Therefore, you must find ways to reduce the expenses you can control, such as overheads. With the Pareto Principle, it’s very straightforward as you buy more of the things you sell and avoid the stuff you don’t.
However, this also has a knock-on effect on other resources, like time. By focusing your attention on your best-selling products, you don’t have to waste time worrying about the inconsequential.
Have you ever heard the dreaded words, “Out of stock”? Most entrepreneurs have, and it sends a shiver down your spine as you instantly know that customers are going to switch off. They are invested in your brand for one reason – and now that it’s gone, they’ll bounce too.
With better control over your stock, you can eliminate this phrase from your vocabulary. After all, you’ll understand when your best-sellers are running low and will be able to top up the levels quickly. Essentially, the 80/20 rule provides extra flexibility because you can fix bottlenecks in your supply chain without any hassle.
Lastly, the simple nature of the rule is why so many companies decide to leverage it to their advantage. All you need to do is figure out which items are in-demand – you’ll probably have this information already – and ensure they are at the forefront of your sales strategy. With analytic software and digital presence tips, it’s very simple.
Can the 80/20 rule help your business? If you want to cut your expenses, have more control and quickly deal with problems, it certainly can.