Inventory planning for all entrepreneurs is a crucial task. Especially in a startup stage when we are working with limited resources and small budgets. Under-ordering can leave startups short of orders and therefore cut down their revenue stream. Over-ordering, on the other hand, can lead to a tricky stage of liquidation of stocks and in worst case, may even cause the startup to shut down. Then how do we make sure that our inventory is ordered rightly? This ‘Brahmastra’ will come handy.
Make a note of VED Analysis. ‘VED’ stands for Vital, Essential and Desirable. The following analysis classifies items based on their importance in a company:
Vital: This category of products can cause a ‘life-death’ situation for a startup. In terms of manufacturing, you cannot proceed with any production activity without these components. And in terms of an e-commerce website, vital products bring you the highest revenue, without which your company might shut down.
Essential: This category of products will not stop the business but surely slow it down by bringing down brand perception. For example, imagine you want to buy a book. Now what if you go to an e-commerce store that sells mobile phones, books etc, and find that all books are out of stock? Will you come back and check the website again? Although the revenue from a mobile phone might be much higher than a small book for the e-commerce website, without the stocks of the books, the website might lose its brand perception among customers.
Desirable: Desirable items are those items that will only cause a minor (or nil) disruption in the overall process if they go out of stock. In terms of e-commerce website, these products can get orders only once a month (or maybe even less).
Now that you have understood the definitions, try classifying your products in these categories. For easy classification, take high-profits (or high-revenue) items as ‘vital’ products. Take high-unit sales products as ‘essential’ and neither revenue nor units products as
‘desirable’ products.
Always maintain the stock of products you have classified as ‘vital’ to your organization. The ones in the ‘essential’ category should only be concerned with, if the ‘vital’ products are in-stock. So if you have limited budget, focus first on ‘vital’ and then on ‘essential’ category of products. And lastly, if at all you still have budget and bandwidth, then and only then focus on the ‘desirable’ set of products.
Hope VED Analysis helps you better plan your inventory.
For any queries, write to me on Rajeev@TBSPlanet.com