Every company wants enough inventory to capitalize on opportunities, but not so much that the costs to finance that inventory become too expensive. Too much inventory and the company’s costs increase. Too little inventory and the company misses opportunistic sales and a chance to increase market share. It almost seems like a no-win situation. Finding the right balance seems next to impossible. However, there is a simple and straightforward approach used by a number of companies that not only ensures their products sell, but sell faster. What is this approach?

Most companies use market research to support their decision on a new product introduction. While they may have the best of intentions, companies know that even the best laid plans sometimes fall short. Customers may want the product, need the product and may be more than willing to pay for it, but still, the product fails. When it does, companies are often left holding inventory that simply can’t be sold. The worst case scenario involves companies selling this inventory for scrap value. It is for this reason that some companies use a product grading system correlated to the number of customers buying the product. In essence, if the product has enough clients buying it, the company will stock it. If the product doesn’t, the company won’t.

Now, you might be reading this and immediately question the wisdom of simply stocking products that sell well versus abandoning ones that don’t. Isn’t there something else at play here? After all, why aren’t customers buying? What went wrong? Shouldn’t the company review what needs to be done to make it a more viable offering in the eyes of customers? Well, the fact is, the company should do that and more. However, until they are better able to answer these questions, they must protect their inventory by not holding product they know won’t sell now and likely won’t sell in the future. Until the company can address these concerns, they should avoid holding inventory of this particular product. This leads us to the product grading system adopted by those companies who prioritize their inventory and its costs, ahead of any potential sale.

Why do companies use the product grading system?

The product grading system is meant to protect the company’s inventory and control its costs. Companies that use a product grading system make a clear distinction between the costs to manage inventory, and the hopes and aspirations of their sales and marketing departments. The mindset is that sales & marketing must first bring the customers on board before the company even considers stocking a particular product. This is in contrast to a number of companies who stock first and then move towards sales, only to find that despite their best intentions, the market and its customers won’t buy. So, how does the grading system work?

First, companies come up with an internal product grade based on the product’s popularity and the number of customers buying it. This is different from basing the product’s grade on its sales revenue, as one client could be responsible for all the sales. If that client leaves, what happens next? Instead, the company wants to mitigate the risk of product obsolescence by ensuring there are multiple customers able to purchase the product. In this case, the company may use numbers or letters to grade the product’s market popularity.

Second, companies using this approach will match the product’s grade with the health of the customers buying the product. If the product is purchased by multiple customers, then the next step is to evaluate the financial health of these customers. This is not only done once, but is frequently reviewed to ensure the company has enough viable options to sell the product to. In essence, the company matches its product’s grade with its customers’ grade or customers’ health.

Third, everyone inside the company is made aware of the product’s grade. Transparency is essential from sales, marketing & customer service all the way to inventory and procurement. The priority is to protect the company’s inventory and mitigate its costs. Sales & customer service are better able to manage customer expectations, as they know immediately whether a product is stocked or not.

Companies that adopt product grading systems within their inventory management practices don’t just ignore why certain products aren’t selling well. However, their number one priority is to protect the value of their inventory by ensuring what they sell, they can deliver. Customers are then trained to buy those products most likely to be stocked. By ensuring there are multiple customers willing to purchase product, the company is better able to manage its inventory and increase its inventory turnover rates.