Many items move through the inventory. You can classify them. One such method to do so is the ABC or “Always Better Control” analysis. ABC analysis in inventory management classifies the items based on their value and how important they are in the business. A: high-value items, B is medium-value items and C is low-value items.
The A items are usually the most expensive and important ones that workers need to handle with care. The B items are also important. While the C items are not as required for the business success
Shall we see more of this in detail?
What is ABC Analysis?
ABC analysis is closely related to the 80/20 rule by Italian economist Vilfredo Pareto. As per his theory, 20% of the valuable forest brings in *0% of output.
When it comes to inventory management, you can assign specific numerical values to three groups of the inventory as mentioned before:
A-Grade
These items in your inventory always perform the best but are also the most costly. These are the goods that have the most customer demand and have the highest yearly consumption value.
It usually represents around 20%. However, if it accounts for 80% of your sales, then it is an A-grade item. Therefore, you must prioritise it.
B-Grade
B-grade products in the ABC analysis in inventory management fall between C-grade items and A-grade items. This is in terms of importance. These intermediate goods contribute 15% of your revenue and can vary between A and C grades based on demand. Ideally, they should comprise 30% of your total inventory.
C-Grade
Even though there are more C-grade products in the store, they are less valuable when it comes to production. When it comes to categories A and C, C-grade items generate around 55 of the stock’s minimum share of 50%.
These items are also referred to as dead stock or slow-moving. C-grades have extremely low value and you should give them low priority in marketing and sales.
All of this follows the Pareto Principle.
However, the Pareto Principle fails to give you a perfect picture of how items will perform. All ABC analysis in inventory management can do is find the “sweet spot- items that can bring you the most profits with the least effort.
Calculating ABC Analysis
This simple computation can help you with ABC inventory analysis.
Annual number of items sold x Cost of each item Annual Usage value per product
You can allocate financial and human resources more effectively if you know which product is profitable. Therefore, you must prioritise your best-selling items based on the result of your analysis.
You can utilise a basic spreadsheet program to conduct ABC inventory analysis. Start by sorting products or resources by their usage value and arranging them in descending order.
Calculate the contribution of each item to the total. Once you have the values for the A, B, and C grades, categorise them based on your criteria, paying close attention to items with the highest value.
Let’s see the benefits of ABC analysis in inventory management.
4 Advantages of ABC Analysis
Here’s how ABC analysis is streamlining supply chain operations:
1. Better Inventory Management Process
With this technology, inventory teams can improve their time management. For instance, they can focus solely on managing category A items. This will help them to improve their stock availability, update demand forecasts or review stock levels more frequently.
2. Inventory Optimisation
Identifying products with high demand enables you to invest in the most profitable items, ensuring they will sell. You can prioritise warehouse space for A items, minimising the risk of obsolete inventory occupying valuable storage space.
ABC analysis in inventory management aids in establishing appropriate inventory rules, such as different service levels, safety stock levels, and re-ordering parameters for each category. For instance, optimising order quantities or safety stocks for A items could result in significant overall cost savings. Additionally, enhancing fulfilment rates for A items can greatly boost overall availability.
3. Enhanced Supplier Relationships
Understanding your most valuable items allows you to build stronger relationships with suppliers for your A items. This could involve improving lead times or negotiating prices to your advantage.
4. Improved Product Life Cycle Management
Tracking items as they transition between categories (launch, growth, maturity, or decline) helps you manage their product life cycle effectively. This enables you to adjust demand forecasts and maintain high service levels for each item accordingly.
With that, let’s see a few real-time inventory control techniques ABC analysis does on supply chains.
Examples of ABC Analysis
There are various uses of ABC analysis in inventory management. Let’s explain the ABC analysis technique of inventory control.
For instance, you can prioritise inventory items for ordering. By focusing on the A items, businesses can always ensure they are stocked and available. It reduces stockouts and improves customer satisfaction.
You can also use ABC analysis to prioritise inventory levels for replenishment. Let’s see why ABC analysis is important.
Why You Must Always Use ABC Analysis
Multiple eCommerce businesses with a large number of SKUs find it difficult to grow their operations. Large retailers also face many inventory challenges. Inefficient processes, lack of stock information and cramped warehouses hinder growth.
Enter ABC analysis in inventory management. It allows you to understand which products of yours move the fastest. With it, you can prioritise merchandise for fulfilment and the best organisation technique for your storage.
Here are a few reasons for using ABC analysis in operations management:
Reliable Inventory Control
ABC analysis is widely favoured by businesses for inventory optimization. By classifying items according to their value and income, businesses can group products based on customer needs. This enables them to determine the appropriate quantities of each product category to order and store in the warehouse.
Forecasting demand poses a challenge, but historical data can provide valuable insights. By analysing past buying trends within your product lineup, you can gain a better understanding of ideal stock levels.
Superior Customer Satisfaction
Imagine how frustrated a customer would be to discover that their intended purchase was out of stock. 55% of lost sales are the result of stock-outs.
By determining your A-grade inventory, you can set up measures so that you never run out of your best-selling products. Customers can check out their carts by ensuring their most valuable items are always in stock.
Optimised Pricing Tactics
Implementing strategic pricing for your products enhances the value derived from ABC analysis in inventory management. Through ABC analysis, online merchants can strategically adjust product prices and categorise them into various segments. This approach provides vendors with more opportunities to increase prices in response to higher demand for the goods.
Strategic Supplier Negotiations
Grade-A goods bring in 70%-80% of the company’s revenue. The ABC analysis technique is used to obtain a fair price on a product from a supplier.
For instance, you are negotiating with a supplier for a shipment of Grade-A products. Invest the largest amount possible as it brings in the most money for your business.
You could get a better price that meets your requirements. Stocking your best-selling products consistently has long-term benefits for your inventory.
Improved Resource Allocation
In reality, warehouses rarely have unlimited space to store all products, necessitating strategic inventory management. Identifying grade-A inventory through ABC analysis in inventory management helps prioritise the top 80% of items for optimal care and placement.
E-commerce businesses benefit from this technique by making informed decisions on stock levels and handling procedures. Focusing on grade-A products minimises costs associated with unnecessary storage and handling. While ABC analysis improves inventory processes, challenges include determining precise inventory levels and categorising items accurately.
FAQs: What is ABC Analysis in Inventory Management?
What is the application of ABC analysis in the automotive industry?
This process can assess the efficiency of the line of workers, get information about resource employment and identify the highest-performing equipment. Additionally, optimised inventory gives an insight into raw materials and aids supplier negotiations.
How does ABC analysis help manufacturing and retail?
ABC analysis segregates 20% of the goods by dividing it based on revenue. It helps the industry to increase profits. With this analysis, the retailers also identify the items that are more profitable to the business. Thus, they can keep adequate stock levels in inventory.
Conclusion
ABC analysis in inventory management is crucial for businesses to prioritise items based on value and importance. This technique, derived from the Pareto Principle, ensures efficient resource allocation and enhances customer satisfaction by optimising inventory levels. Qodenext, as a leading supply chain expert, can help businesses streamline their operations with tailored ABC analysis solutions.
