Many bosses contacted me after reading my previous article, saying they reviewed their inventory and found that nearly half of their profits are tied up in less than 10% of their products, while those seemingly well-selling items aren't actually making money.
At the CFC conference in March, during the "Tower Alliance Warm-up" session, I spent a full hour explaining the four-quadrant analysis, and the response was enthusiastic.
However, after receiving more and more feedback from Tower Alliance distributor bosses, I realized that their understanding and application of the four-quadrant analysis still stops at adjusting the existing product mix.
After they reviewed their inventory and adjusted the mix, two or three months later, the inventory started getting messy again. The problem wasn't truly solved.
Products come in batch by batch. If the logic behind purchasing doesn't change, the structure will never be fully adjusted.
When inventory structure goes wrong, if you trace back a step, you'll almost always find a problematic purchase order. Adjusting the structure is like locking the barn door after the horse has bolted; choosing the right products to purchase is the real root cause.
Therefore, this article is dedicated to explaining one thing: how to use the four-quadrant analysis to reduce inventory pile-ups and losses at the source.
The Biggest Misconception in Inventory Management
Using "Proportion" Instead of "Velocity"
Every time you need to restock, how do you decide how much of each product to order?
The vast majority of distributor bosses look at their inventory.
They see which product is about to run out and order more of that, and which product has plenty of stock and order less of that. When the order is placed, every product is included, and the proportions look balanced.
This approach sounds reasonable, but it contains a fundamental error: Low inventory doesn't mean fast sales.
The reason slow-moving products "don't look like much" isn't because they sell quickly; it's because they don't sell at all, so they just sit there slowly depleting, always just a few cases. Fast-moving products "look like a lot" because market demand is high, so you naturally order more, and the inventory looks larger.
But most of the time, human intuition easily confuses these two things—seeing low stock makes you want to replenish, seeing high stock makes you think it's enough.
The result is that fast-movers don't get ordered enough, while slow-movers get stuffed into the warehouse order after order, under the guise of "balancing the inventory structure."
This logic used to work in the past. Back then, distributors had agency rights, products had price differences, and manufacturers provided policy protection. Overstocking just meant slower capital turnover, but the goods would eventually sell.
But now it's different. Supply exceeds demand, prices are transparent, and slow-moving products sitting in the warehouse incur storage costs and capital interest every day, while product dates count down.
Inventory is no longer an asset; it's a risk.
Previously, while providing consulting for a brand, I met a distributor in Chenzhou who handled Lay's potato chips, with nearly 200 SKUs.
At the end of the year, he still had some tasks unfinished, so he planned to stock up at year-end to wrap up. Since the New Year was approaching, his idea was to stock up on every product to avoid shortages during the Chinese New Year (CNY).
This is the instinctive reaction of most distributors—spread the product line, have stock of every item, and feel secure.
But after hearing this, I told him, "If you really order like that, you might lose your shirt!"
During the New Year period, consumer purchases become more concentrated. Whether for gifting or entertaining guests, people tend to buy only the most well-known main SKUs of a brand—high recognition, face-saving, and safe.
Therefore, the better the brand, the faster the sales growth of its main SKUs during the New Year; those supporting products that normally sell slowly become even harder to sell during the holiday.
So I used the four-quadrant analysis to categorize his products by brand (for how to do the four-quadrant analysis, see previous articles; I won't repeat it here). I told him that for the 2 million yuan stock-up, he should only order products in the first and second quadrants (main SKUs), and not a single item from the third and fourth quadrants.
He followed my advice.
On the eighth day of the New Year, another local Lay's distributor had completely sold out of main SKUs and was left with only supporting products in the warehouse. This boss, on the other hand, had few supporting products left, having cleared them through natural sales before the New Year, and his warehouse was full of fast-moving goods.
At that time, the local market was out of stock on main SKUs, and his entire inventory sold out within a week.
Both stocked up, but one ended up light, the other with a clogged warehouse.
The difference isn't whether to stock up, but what to stock up on.
One Order Saves 750,000 Yuan
The Lay's case illustrates the product selection logic for pre-holiday stocking. But more often, distributors face another pressure: the manufacturer requires them to pay and stock up at a certain time, and the amount is not small.
At this point, the question of "what to stock up on" becomes even more critical.
Last year, I served a Tower Alliance distributor boss. When I took over, his warehouse had nearly 8 million yuan in inventory of a certain brand. At the normal sales rate, that was enough to sell for over three months. The brand also required him to place another 1.8 million yuan order to complete the annual task.
Their purchasing manager brought me an order. I looked at it and saw that 40% of it was slow-moving products from the third and fourth quadrants.
I asked the purchasing manager, "Why order so many slow-movers?"
The purchasing manager said, "Mr. Yang, all our SKUs are fully stocked, especially the fast-movers. I originally planned to order only 450,000 yuan of slow-movers, but to reach the 1.8 million yuan order, I added another 300,000 yuan from the third and fourth quadrants."
This is a common mistake many purchasing managers make when ordering.
Fast-movers: the warehouse is full, no need to order more;
Slow-movers: not much left in the warehouse, so they add them to fill the order.
I didn't argue with the purchasing manager about whether to add slow-movers. Instead, I did the math for him.
At that time, the distributor's inventory structure had a ratio of fast-movers to slow-movers of about 5:1, meaning out of 8 million yuan in inventory, 6.4 million was fast-moving and 1.6 million was slow-moving. The velocity of fast-movers was more than 20 times that of slow-movers, meaning you'd sell 20 fast-movers to sell 1 slow-mover.
If they followed the original order, slow-moving inventory would reach 2.34 million yuan. How long would that take to sell?
The purchasing manager was speechless. Later, I adjusted the order: all 1.8 million yuan went to first and second quadrant fast-movers, with zero from the third and fourth quadrants.
The subsequent data was telling. We took over the company in July, and by September, fast-moving inventory was already healthy. The original 1.6 million yuan in slow-moving inventory didn't start to decline noticeably until January of the following year.
In other words, if that order had included the 750,000 yuan of slow-movers, those goods would have sat in the warehouse until after the New Year before starting to sell.
From payment to actual sales, over half a year, that money was tied up in the warehouse.
Storage costs and capital interest were accruing, product dates were counting down, and the goods were depreciating.
That 750,000 yuan, ostensibly to complete the task, actually locked up the company's cash flow for half a year.
Stockpiling isn't the sin—stockpiling the wrong products is!
How to put this understanding into practice? Not just through insight, but by making operations "visible."
Inventory decisions are the first step that needs to be "illuminated."
Many distributors, to avoid stockouts of a particular SKU, will order another 1 million yuan even if they already have 1 million in inventory. If the manufacturer wants them to stock up 2 million, that means they need to order an extra 1 million.
For that extra 1 million, stick to one principle: only order first and second quadrant products, and not a single item from the third and fourth quadrants.
But many distributors do the opposite—they originally planned to order 1 million of fast-movers, but when the manufacturer pressures them for another 1 million, they tend to broaden the product line and order a bit of everything, thinking this maximizes sales.
From a data perspective, that's exactly the trap.
Fast-movers typically turn over 20 to 30 times faster than slow-movers, and it's rare for a distributor's warehouse to have a 20-to-30 times inventory ratio. The extra 1 million should be strictly for fast-movers to minimize risk and maximize turnover.
Using the four-quadrant analysis to guide stockpiling isn't a one-off action; it should become a fixed habit. Especially at these two times of the year, it must be strictly enforced annually:
First, every December.
The reason is simple: goods ordered in December will cross into the new year. Slow-movers already sell slowly, and after the new year, their dates are even shorter. Then they won't sell and can't be returned—all trouble.
Second, pre-holiday stocking.
Whether the New Year falls in January or February, pre-holiday stocking should also only include first and second quadrant main SKUs.
During the New Year, consumers have a wide variety of products and brands to choose from, and purchases are highly concentrated, creating a situation where "fast-movers sell even faster, and slow-movers become even harder to sell."
If you choose to stock slow-movers at this time, you're essentially putting your money into the hardest-to-move goods.
These two points are when distributors face the highest inventory risk of the year and are most prone to mistakes. If you control these two gates, your annual inventory structure will be basically stable.
Due to space limitations, I can't detail all the practical applications of the four-quadrant analysis here.
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