Reduce stocks, increase income and reduce costs through stratification

What is stratification and why is it needed?

Stratification (Stock stratification / Item stratification) is the result of the classification of stocks into categories. This segmentation helps the company decide which items should be left in stock and which should not. In other words, this tool allows a company to store the right products in the right quantity and in the right place.

Without proper stratification of items in your warehouse and store, restocking issues can arise. Here is some of them:

1. The emergence of Out-Of-Stock (Sales OOS, "out of stock"), which will lead to a decrease in the level of customer service;
2. Occurrence of Over-stock (overstock, re-stocking) - when SKUs are stored in a warehouse or at a point of sale in quantities exceeding the standard balance;
3. Errors in the estimation of reserves that affect the financial condition of the company.

Inventory stratification helps you classify items and therefore apply a forecasting and replenishment strategy to them. These strategies are very helpful in maintaining the optimal quantity of items in storage. However, manually implementing such strategies is labor-intensive and there is a risk of a human factor.

How does stratification help maintain optimal stock?

Stratification does not replace forecasting, but helps in making purchasing decisions. Correctly performing product stratification has the following benefits for your company:

• Improving the level of customer service;
• Returning the margin provided by other companies (distributors, suppliers);
• Increased opportunities for reinvestment;
• Increase in EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) - profit before interest, taxes and accrued depreciation.

Stratifying your company's inventory helps you focus not only on products with high sales and turnover, but also on products with low turnover (slow moving).

Stock stratification methods

The first thing your company needs to do is create an action plan and define criteria for stratification. To do this, it is necessary to identify the processes used, checkpoints, and also what data is available to analyze the achievement of this goal.

Most companies stratify their products in one form or another, but few apply a methodology with more than one or two breakpoints.

Examples of control points:

• Maximizing GMROII (Return on Investment in Residuals) in terms of cost reduction and profit enhancement.
• Reduction of COGS (minimization of purchase prices and transport costs), optimal use of economies of scale in procurement
• Optimization of the frequency / schedule of purchases
• Increased inventory turnover

Typically, a company has to take into account numerous criteria, milestones, and data to properly stratify the residuals. It is best to use specialized tools to improve the quality of the process. Let's take a look at what solutions are there.

The base stock is designed to smooth out the frequency of orders, delays in deliveries, and statistical forecast errors. For accurate sales forecasting and demand in the C4R portfolio there are solutions based on the SR Demand Forecasting module.

The safety stock is calculated automatically and takes into account the Supplier Service Level (meeting delivery deadlines), the Target Service Level based on the ABC classification.

Safety stock allows the user to add his own adjustment to the amount suggested by the system to cover presentation balances or weather-related risks.

Promo allows you to take into account multithreaded optimization when placing orders for products participating in a constant flow and promotions.