Lesson 6 - Use ranking by “hits” to separate stock from stuff.

     About a hundred years ago, an Italian economist, Vilfredo Pareto conducted some research on income distribution in Italy. He found that 80% of the income was earned by 20% of the people.

     You may find this interesting but wonder what this has to do with separating your stock from your stuff? Well, other folks later applied that concept and found that generally, 80% of the results of any process are produced by 20% of the contributing factors. As a result the 80-20 rule was established. This suggests that 80% of your sales are generated by 20 of your service techs and 80% of your sales come from 20% of your customers and 80% of your stock involve 20% of your inventory items. But this rule is not usually completely accurate. In fact, we have found with many companies, including our own, that 80% of the product usage is only generated by around 10% of the stocked inventory items! Don’t assume the 80/20 rule applies to your business. You can greatly simplify your life and make your business so much more efficient by identifying those 10% of products that make up 80% of your usage and focus on them while setting up an efficient system to take care of the others so they do not sap undeserved time and energy from the products that will greatly effect your success. By identifying the top 10% of your products by number of times it’s used on a job (which means a small, inexpensive fitting may be an A item while a large, expensive fixture may be a “B” or even a “C” class item), you will greatly reduce the amount of times you run out of critical items.

     You will also be able to cut your dollar investment in inventory down because you will be watching those items more often and therefore placing smaller orders more often to keep your cash moving.

     We have found that unless you create a system for adding new products things can get out of hand in a hurry. Although you never want to stifle being on the front end of a great new product that can set you apart and create new opportunities for profit, one person should be in charge of approving all new additions. Successful businesses realize that adding new items is an investment that should be considered carefully and have a new product questionnaire that asks questions such as: What customers will buy this product? What are the sales projections for each of the first six months after introduction? What information is being used as the basis for these projections? What affect will sales of this product have on the usage of existing products?