How the 80/20 Rule Helps Manage Inventory in your POS Software Effectively
Efficient inventory management is key to successfully operating a retail store. This is accomplished by ensuring each dollar invested in your store’s inventory is effectively earning margin dollars by using advanced pos systems.
Have you ever heard of the 80/20 rule, also known as the Pareto principle? It is a concept that has been applied to almost every element of life, and it applies equally well to retail. The 80/20 rule states “that, for many events, roughly 80% of the effects come from 20% of the causes.” In a retail setting, it means 80% of the margin is generated from 20% of the department’s inventory.
Let’s look at how this simple rule can help you manage unproductive inventory — resulting in a significant increase in inventory turns and increase your return on investment percentage.
Begin by running a best seller report, generated within your POS software. Identify items in these three areas: top 80%; middle 15%; and bottom 5%. The best seller report should rank items for a department by margin dollars earned during a selected period.
Once you have identified the three groups of items, then you can assess the items and make adjustments accordingly. Here are our suggestions:
- Promote those items that make up the top 80% of margin (and make sure you keep plenty on hand for people to purchase).
- Merchandise or discount the bottom 5% of margin (and do not reorder these items).
- Selectively review the middle items, and limit your inventory investment on those items.
It may be difficult for some retailers to part with inventory that they feel will eventually move, but using the 80/20 rule from an unbiased perspective can help the bottom line. We like to say “the bottom 5% will never be missed.”
The use of the 80/20 rule in regards to retail, combined with an effective point of sale software will help you maintain a lean, yet lucrative inventory.
Have you explored point of sale systems with advanced reporting capabilities? Try a 30-day free trial of POSIM to see how reporting can help you increase sales and manage inventory efficiently.