Inventory management goes far beyond simply deciding when and how much to buy. In practice, good decision-making requires balancing two key factors: product availability and financial results.
An effective way to do this is to analyze the items based on two key indicators: contribution margin and inventory coverage.
While the margin shows how much each product contributes to the company's profit, coverage indicates how long the current inventory sustains demand. By cross-referencing these two dimensions, it's possible to organize inventory items (Stock Keeping Units, or SKUs) into quadrants and direct targeted actions.
How to put this analysis together in practice.
The first step is to structure a database with, at a minimum, average sales, current inventory, and margin per item.
From this:
- Coverage (days) = current inventory / average daily sales
- Margin = as already calculated by the company
With these indicators, all you need to do is plot a scatter plot:
- X-axis: coverage
- Y-axis: margin
The most important point is not the graph itself, but how to define the cutoff points between high, medium, and low.
These limits vary by company, but some approaches help:
- Use percentiles from the base (median, quartiles)
- Use business parameters, such as inventory policy or minimum margin.
- Combining the two perspectives
Most importantly, the cuts must make sense for the operation and support the decision.
Before delving into the quadrants, it's essential to note one crucial point: inventory management doesn't happen in isolation.
Although the inventory manager determines when and how much to replenish, the inventory level is the result of decisions from various areas. The product area can expand the portfolio and generate cannibalization. The purchasing area can anticipate volumes to capture commercial gains. The sales area can alter demand with prices and promotions.
Therefore, reading the quadrants should not be merely operational. It is also a tool for aligning areas.
Quadrant A: High margin and low coverage
Items positioned in this quadrant are both profitable and scarce. In other words, any stockout represents a direct loss of margin.
The main priority here should be ensuring availability. This means speeding up purchase or production orders and, if necessary, reviewing replenishment parameters. At the same time, it's important to avoid commercial actions that further increase demand, such as promotions.
This quadrant can also highlight misalignments with purchasing, for example when strategic items are not being prioritized in negotiations or supply planning.
These are products that are essential.
Quadrant B: low margin and low coverage
In this case, the items have low inventory levels, but also low profitability. Although restocking is still necessary to avoid stockouts, the decision should not be purely operational.
This presents an important opportunity for commercial adjustment. Price increases, for example, can help reduce demand pressure and improve margins without necessarily compromising service levels.
This quadrant can also reflect inefficient portfolio decisions, with items that occupy space and operational effort without generating significant value.
It's not just about replacing, but about replacing better.
Quadrant C: High margin and intermediate coverage
Items with high margins and intermediate coverage are in a zone of positive attention.
These products are important to the bottom line and, at the same time, do not represent a critical excess of inventory. Even so, it is important to monitor demand trends and prevent them from shifting to scenarios of excess stock.
Depending on the company's strategy, it may even make sense to slightly increase the coverage of these items, ensuring availability and capturing more margin.
Quadrant D: low margin and intermediate coverage
Here are some items that don't generate much result and are neither out of stock nor in excess, clearly.
This is a quadrant that often goes unnoticed, but it deserves attention. It can indicate products that are taking up space without a clear value proposition.
It's worth evaluating the role of these items in the portfolio and understanding whether they make sense in the long term or if they should be adjusted, repositioned, or even discontinued.
Quadrant E: high margin and high coverage
Items with high margins and excess inventory represent an ambiguous situation. On the one hand, they are important products for the bottom line. On the other hand, there is excessive capital tied up.
The decision depends on demand behavior. If turnover is healthy, simply temporarily halt orders and allow natural consumption to reduce coverage.
If demand is weaker, promotional actions can help accelerate sales, even if this implies some reduction in margin in the short term.
Often, this scenario is associated with purchasing decisions that anticipate volumes to capture better commercial conditions. Without alignment with demand, the gain in purchasing can turn into financial cost and risk of obsolescence.
Quadrant F: low margin and high coverage
This is generally the most critical quadrant of the analysis. Here are products that, in addition to being unprofitable, are in excess inventory.
The main recommendation is to stop restocking immediately. These items should not continue to consume capital. Simultaneously, it is important to work on reducing inventory, either by increasing its commercial exposure, improving sales conditions, or encouraging its sale.
This quadrant is usually a clear reflection of misalignments between areas. It can arise, for example, when purchasing prioritizes volume discounts without considering actual turnover, or when portfolio decisions increase complexity without supporting demand.
Lowering prices doesn't always solve the problem. The exit strategy needs to be carefully considered to avoid worsening the already low profitability.
Negative margin: discussion beyond inventory.
Regardless of the coverage, products with negative margins require a more in-depth analysis. The issue ceases to be operational and becomes strategic.
Does it make sense to keep this item in the portfolio? Does it play a relevant role, or is it just consuming resources?
Without a clear justification, the tendency is for value to be destroyed over time.
This analysis transforms inventory into a decision-making tool, not just a consequence of operations. By providing visibility into excess inventory, stockouts, and profitability, it helps align purchasing, sales, and products around a common logic.
This is especially relevant in retail companies, where portfolio complexity leads to more fragmented decision-making. Without this type of analysis, the result tends to be the same: an excess of stagnant inventory, a lack of relevant products, and poorly allocated capital.
Ultimately, it's about moving from reactive management to value-driven management, with more coordinated decisions and more efficient use of capital.
Fernanda Monteiro
More than 11 years of experience in training and consultancy projects, focusing on Logistics and Supply Chain. In consultancy, he carried out projects such as Transformational Logistics Plan, Diagnosis of logistics operations, Strategy and Calendarization of Transport Operations, Measuring the Cost of Serving, Market Study, Mapping of Inventory Reduction Opportunities, Review of the S&OP Process, Management Plan Training and Implementation of Commercial Processes in companies such as Nestlé, Raia Drogasil, Ipiranga, Lojas Americanas, B2W, Coca-Cola, Andina, Embraco, Martins Atacado, Loja do Mecânico, Santo Antônio Energia, Ecoporto and Silimed. She is currently one of the teachers of the Inventory Management Course taught every six months by ILOS. She worked on the development and management of Online Courses in Logistics and Supply Chain, Supply Processes, Demand Planning, Inventory Management and Industrial Management. Still in the training area, she was responsible for applying ILOS business games in companies such as Raia Drogasil, Fibria, NEC, Novartis and Moove.
