Last month we began a discussion of ranking your inventory using three different criteria:


  • Frequency of sale or use (i.e. the number of times the product is requested regardless of the actual quantity requested)
  • Profitability (i.e., annual gross profit dollars)
  • Cost of Goods Sold


For example, an “AAC” ranked product is frequently requested (the first “A”), generates a lot of profits (the second “A”), but is relatively low in cost (the “C”).  This is an item you probably always want to have in stock.  We received a lot of responses showing interest and enthusiasm for this concept; but also a lot of questions concerning its implementation.  Here are some of them:


If we can utilize only one of the three methods, which should we choose?  Frequency of sale or use (also known as “hits”) is the most important ranking.  Remember that the first part of the goal of effective inventory management is to “meet or exceed customers’ expectations of product availability”.  The more times customers request a product, the more important it is to have that product available in reasonable quantities.


Can we substitute total quantity sold or used over the past 12 months for frequency of sale in ranking products?  We don’t suggest it as this practice can misdirect your efforts.  For example, it is probably important to always have in stock a product that had total sales of 1,000 pieces last year which were sold in 1,000 transactions (i.e., one at a time).  However, if you sold the same number of pieces in one or two transactions per year, wouldn’t you want to consider designating the item as a special order or non-stock product?


How can we implement multiple rankings if our computer system only maintains a single character for product rank?  We have had many customers translate multiple product ranks into a single character in their ERP system.  First, they perform the multiple ranking of products in a spreadsheet.  Then they translate the results into a single character.  Unfortunately, total combinations using three characters for ranking exceed the 26 letters in the alphabet.  So, we recommend that you just combine the ranks for frequency of sale and gross profits.  An “AA” (high hits and high profitability) product is assigned a rank of “A” in the system, followed by an “AB” (high hits but lower profitability) item which will be ranked as a “B” item. Toward the bottom will be a “K” ranked products (“C” ranked for both hits and profits) followed only by non-moving or “dead” items (usually ranked “X”).


What if our computer system doesn’t accurately record frequency of sales or hits?  Replace this ranking with one that reflects months or weeks with sales within the past 12 months.  An “A” item might have been sold in nine to 12 of the past 12 months, a “B” item might have been sold in four to eight of the past 12 months, and a “C” product might have had sales in one to three of the past 12 months.  Note that using months with sales instead of hits might not accurately categorize seasonal products.  That is, products with a lot of activity in a limited amount of time.


Multiple product rankings provide you with meaningful information concerning how each item in your inventory contributes to your customer service level and inventory investment goals.  Please let us know if you would like some assistance in developing this strategy for your organization.  Also please note that three way ranking will be featured in our EIM Workshop on March 26-27!