Remove the sting
From service levels to stocking decisions, the insights provided by the ABC analysis should be used as a driving force to shape the assortment and help make informed decisions. The following 3 steps can be adopted today to help reduce inventory levels, improve cash flow and help maximise the profitability of your long tail.
1. Stocking decisions
There are likely to be a number of long tail items that are not worth stocking at all as they simply do not offer a significant enough margin to justify investing in stock. However, by not stocking such items, this may put customers off from purchasing items with much higher margins. For instance, while nuts and bolts are unlikely to offer large margins, no one will buy more expensive components if they cannot also get all the components that go with it.
Furthermore, there also may be a number of items which are currently non-stocked which would actually be better to keep stocked at all times. This is particularly true for items where there is either a longer lead time or a low level of supplier reliability.
In order to make the correct stocking decisions, businesses should base their decision on a broad range of metrics. For instance; how much margin does a product offer? Does the product have a major impact on the sales of other items? How much footfall does the item create? Is there an alternative product that could be sold instead? Does the product have a political impact on supplier relations? Is the product important to the key customers?
Through utilising the insights from an ABC analysis to decide whether or not to change the stocking status on an item, you can boost customer satisfaction by ensuring the most important items are readily available. Equally, through using such insights to refine your assortment, you can remove items which do not contribute towards achieving the overall business goals. This, in turn, can help free up working capital which can then be reinvested elsewhere in the business.
2. Re-assess your inventory policy
Given that many business’ long tail items are likely to have volatile demand patterns, it can be very difficult to determine exactly how much inventory should be held. Given that the level of safety stock will differ depending on the importance of each item, it is inevitable that A-line items are likely to have a greater requirement for safety stock as going out of stock could cost the business dearly. However, for long tail items determining safety stock can be a little more challenging.
On one hand, holding excessive safety stocks could mean unnecessarily tying up working capital into slow moving stock which is always at risk of becoming obsolete. However, on the other hand insufficient inventory levels could hamper sales and leave customers disappointed. In order to ensure that inventory levels are appropriate, there are a range of factors that have to be taken into consideration.
3. Prioritise areas which require attention
The real advantage of a well-developed ABC analysis, is that the outcomes enable you to prioritise the areas which require the most attention. With clear insight into which items have the biggest impact on your ability to achieve your strategic goals, you can begin to focus actions on areas which will deliver the greatest benefit. For instance, in order to optimise long tail items, this may present an opportunity to re-negotiate minimum order quantities and lead times or even find entirely new suppliers.
Through reviewing each category that arises as a result of the ABC analysis, you can gain a much clearer picture of how your assortment is performing. Consequently, this approach enables you to spend more time investigating potential problem areas within the long tail, thus helping to ensure the assortment is as refined as possible.