Written by Ruvisha Pillay | Contributors: Sophie Ingram, Gail Haggerty

In this article, we aim to provide you with a basic understanding of Classification and Policy Settings. We will begin with describing the reasoning behind classification, and the types of classification available within the app. Once you have a sound understanding of that, we will move on to the Replenishment Cycle and Target Fill Rate policy settings (what it means, and where to set it up). We will conclude with what you can do about items that do not fit perfectly into a further classification bucket. Look out for the relevant articles that will add value to your search for more information on these topics, a full list of these is available at the end of the article.

Planning for each and every item in each and every location can be challenging. You need to make sure you have the right stock, at the right place, at the right time. It is difficult to view hundreds or thousands of inventory items every day and know exactly what to buy, what is running short and what is running into excess. We cannot function efficiently by looking at every single item in every location every day. We need to get to a place where we can just look at specific items that need attention. The best way to get focus on the items that require attention is by classifying items. This is one of the most important tasks in managing inventory.

The first fundamental decision you need to make would be what to set your item classification to. You would set your items’ Primary classification by allocating a stocking indicator to each item. Thereafter, Further classification may be needed (applicable to stocked items). That would involve grouping similar items together and using a broad brush approach to apply inventory policy to the items on a group level. In other words, the replenishment cycle and target fill rate figures will be the same for all items in a group, with a few exceptions if you choose. This saves you time, because you would now be analyzing a group of items and applying inventory policy on this higher level, rather than analyzing hundreds or thousands of items individually and trying to apply policy to each and every item that way.

As a planner/buyer for your company, you would need to know the buying strategy for each of your items. Which items are you going to keep in stock, ready for customers to buy? Which items are you only going to replenish if there is firm demand? Which items do you not want to replenish at all for the foreseeable future? Once you have this information, you can classify your items into the following stocking indicators:

To read more about these, please refer to article What are the Stocking Indicators?

Obsolete and non-stocked are easier to plan for than stocked items. For obsolete items, you never have to place an order. For non-stocked items, you will only order when there is firm demand. Now the major category will be stocked items. Stocked items have more complexity because we need to ensure we have enough stock on hand at all times to satisfy demand. We therefore need to further classify those stocked items into more manageable groups.

We know that stocked items may be a complex category. Primary classification is not enough. We need to split it even more to make our planning decisions both efficient and effective. We can get a further breakdown within the app by using dual ranking. The app looks at the forecasted value items are going to bring in (or the historic value that the items have brought in), and the forecasted number of units that items are going to sell (or the historic number units that the items have sold). That information will then form the below matrix. To understand more about this, please read article Further Classifying Stocked Items.

On the app, navigate to the left pane of your screen. Select the drop-down on Settings, and then select Classification. Please see the quick article on Classification parameters and setup.

Step 1 & 2: Obsolete and Non-stocked items

An example for an item you may want to set to Obsolete might go as follows. You are the planner for Umbrellas & Raincoats Unlimited. The store sells only Umbrellas and Raincoats, so it is important to stay on trend to make sure people have motivation to come to your store for their umbrella & raincoat needs. It is December 2022 and you still have active item codes that were fashionable in 2020. No one has ordered those items since Dec 2020, and you therefore did not need to replenish the item once the stock was run down. However, these items still show up on your reports when you’re reviewing “Stocked” items because you have not had the opportunity to change the stocking indicator in your ERP. Every time you run the report, you sort by items with zero stock on hand and you have to actively remind yourself that these items are okay to have no stock on hand because they are not trendy at all, and you’re quite sure your supplier is not even manufacturing them any more. To make sure you do not get any orders for this item, and to de-clutter and maintain your app, the best route to take would be to have those items correctly classified. You can do this within the app by entering your rules within the correct fields i.e. items that are more than “x” months old and have had no sales in “x” months.

Let’s use this scenario for example for an item you would like to move to Non-stocked.

Perhaps you have sourced an extremely expensive leather umbrella with a diamond-encrusted handle. However, you have seen that sales on this item have been rather slow. You have similar items in store where you have procured the items which have cost you money, and takes up a fair bit of space on the shelf. You may therefore not want to keep this stock on hand because it is tying up your working capital and taking up space. You want to rather just replenish this item when you have a firm order. In order to weed out which of your items are moving slowly and should become Non-stocked, you can set up the rules within the correct fields i.e. items that are more than “x” months old and with no more than “x” hit in the last “x” months.

Step 3: ABC & HML items

Within this setting, you can specify if you would like to look at the forecast value or units that will sell, or the historic value or units that have sold. For ABC items, this can be weighted by cost price, selling price or margin. It is important to note that selling price may often be a listed RRP, rather than an average historical selling price or true selling price after discounts. As a result, the margin may be impacted. This information is typically not maintained as well as cost price. It is therefore important to check that the information is reliable and accurate before choosing this weighting for classification purposes.

For HML items, it will always be in units so there is no option for weighting. Depending on how reliable you find your forecast to be, you may opt to choose “Forecast” for the basis for your calculation. If you find that your sales are largely erratic even with the fitting forecasting demand types applied, you may opt to choose “History” when choosing your basis for calculation.

Please read Understanding classification percentage split for information on the calculation behind the percentage split. The percentage split as a default within the app is 80/16/4, but this can be adjusted to cater for your unique company and product mix. You could do a different percentage split, for example 65/30/5, which would mean the items with your highest focus and planning rigor would be on the top 65% instead of the 80%, and your moderate focus would then be on 30% rather than 16%.

Stocked items require inventory policy to be applied so that the calculation for safety stock and ultimately recommended order quantities can be generated. In this portion of the article, we will discuss the Replenishment Cycle and Target Fill Rate inventory policies.

Stocked items go through a cycle of receipts and consumption. When an item is received, it is expected to be consumed within a period of time, before the next delivery arrives. The time period between deliveries is the replenishment cycle (RC). The RC needs to cover you with stock from one delivery to the next. For example, you have a 7 day RC - when you place a purchase order, that order should last you for 7 days. For more information about what an RC is, have a look at article What is a Replenishment cycle?

You will be required to set up the policy for RC and at that point, you may seek some guidance on whether you would need a long or short RC for your items. Refer to the article Long vs short replenishment cycles for more information about what to consider when setting up your policy.

Your target fill rate refers to the availability of stock. If you have a 95% target fill rate, you are willing to accept 5% unavailability of stock, while still aiming to deliver 100% of customer orders. Please refer to the article What is Fill Rate and how is it calculated? for related information.

The higher your target fill rate, the higher your safety stock level needs to be. Refer to the article The five factors that influence the calculation of Safety stock to read about the factors that influence the safety stock calculation.

On the app, navigate to the left pane of your screen. Select the drop-down on Settings, and then select Policy Defaults. For guidance on the set up, refer to article: Setting up Policy Defaults

There may be items that require different policy settings to the buckets they fall under. In that case, you can single them out and use “Policy overrides” to specify your preferred policy. To do this, you can navigate to the left pane of your app. Select the drop-down on Settings, and then select Policy Overrides. Refer to article Policy Overrides: What are they and how to use them? for more information on this.

By now, you should have a good, foundational understanding about classification and policy settings. There are other resources available to you for more information within the app (videos and in-app help tours). You may also chat with a consultant for more detailed information that is specific to your business.