In most warehouses, a small number of items accounts for most of the value. Intelligent inventory management starts by admitting that: tight control over the valuable few, simplified procedures for the cheap many.
1 ABC classification
| Class | Share of items | Share of value | How it is managed |
|---|---|---|---|
| A | About 20% | About 80% | Close monitoring, frequent counting, high service level |
| B | About 30% | About 15% | Periodic review and automated levels |
| C | About 50% | About 5% | Larger quantities, fewer orders, simplified process |
Value is not the only criterion
A valve worth fifty riyals that halts a production line worth a million a day is a class C item by value and a class A item by importance. Add a criticality classification alongside the value one: what is the effect on operations if this item runs out? Items are not managed by price alone.
2 Turnover and days of cover
Turnover
Cost of sales ÷ average inventory
Days of cover
365 ÷ turnover
Reading it
Higher turnover = faster cash
The limit
Very high turnover may mean frequent stock-outs
The measure is judged against the sector and the company’s own history, not an absolute number
| Item | Company A | Company B |
|---|---|---|
| Annual cost of sales | 12,000,000 | 12,000,000 |
| Average inventory | 1,000,000 | 3,000,000 |
| Turnover | 12 times | 4 times |
| Days of cover | 30 days | 91 days |
Both sell the same amount, but B has frozen two million riyals more in the warehouse. At an 18% holding cost, that is 360,000 riyals a year — profit that disappears without ever appearing as its own expense line.
3 Other measures that complete the picture
| Measure | How it is calculated | What it reveals |
|---|---|---|
| Item availability | Orders filled complete ÷ total orders | Service quality from the customer’s view |
| Inventory accuracy | Matching locations ÷ locations counted | Whether the system is actually being used |
| Slow-moving share | Value not moved ÷ total inventory | How much cash is buried |
| Shrinkage rate | Damaged and missing ÷ total inventory | How well goods are kept and handled |
| Expiry rate | Expired ÷ sold | Whether oldest-first rotation is working |
Accuracy is measured by location, not by total
A book total equal to a physical total does not mean accuracy: a shortage in one item may be offset by a surplus in another. Real accuracy is the share of locations where both the item and the quantity matched — and it is always lower than everyone assumes.
4 Slow-moving and dead stock
- A written definition: anything that has not moved within a set period is classified as slow-moving automatically.
- A monthly report of slow-moving stock, its value and its age, going to management and not only to the warehouse.
- Graduated treatment: push the sale, then discount, then use as a substitute, then return to the supplier, then write off.
- Delay makes the loss worse: the value does not wait, and the space it occupies has a cost.
- A write-down provision is raised for slow-moving and obsolete stock, since the accounting standard prohibits carrying it above its expected recoverable amount.
- The root question: why did it stall? Over-buying? A bad forecast? A discontinued product? Without the answer it will happen again.
Lesson summary
- A few items carry most of the value, so they are managed differently from the rest.
- A criticality classification is added to the value classification.
- Turnover = cost of sales ÷ average inventory, and days of cover is its inverse.
- Equal sales with unequal inventory means a large difference in profit.
- Inventory accuracy is measured by matching locations, not by equal totals.
- Slow-moving stock is defined by rule, treated in stages, and its cause investigated.
5 Test your understanding
Three quick questions
Pick the answer you believe is correct and you will see the result immediately.
1. Cost of sales is 12 million and average inventory 3 million. Days of cover is roughly:
Turnover = 12 ÷ 3 = 4 times, and days of cover = 365 ÷ 4 ≈ 91 days.
2. A cheap valve whose absence halts a line worth a million a day. Its classification:
Operational criticality is a dimension independent of value, and ignoring it is among the costliest mistakes.
3. The total book inventory exactly equals the physical total. The correct conclusion:
Accuracy is measured at item and location level, not at the level of the total.