By channeling your resources toward high-priority inventory, you can rest assured you’re putting the odds of success in your favor. ABC analysis helps businesses get insight into their supply chain, reduce inventory, and improve inventory management efficiency. And properly applying it does not require a data analyst or a substantial amount of resources.

It’ll pull historical sales data to show you your best (and worst) performing inventory within just a few clicks. While an ABC analysis is a simple way to find your best and worst performing stock, it does have its downsides. You’ll confirm you have the right amount of inventory for your highest value products, rather than waste precious time cycle counting low value stock.

What is ABC analysis/ABC classification?

Imagine ACME Widgets Inc. is a made-up company using a clever method called ABC analysis to organize its products. They divide everything into three groups based on how much money they bring in. As the sales increase, demand for the product also increases, so you need to increase the stock to avoid stock-outs.

The inability to make informed decisions on inventory management, demand forecasting, and supply chain optimization is hampered by a lack of detailed information about individual items. The ABC method provides a structured and methodical approach to inventory management, bringing order to the otherwise difficult task of keeping track of all inventory items. With the help of a clear categorization of items into A, B, and C classes, businesses can focus their attention and resources on the most important inventory items. Implementing the ABC inventory analysis method provides businesses with a powerful tool for maintaining control over expensive items that have a significant amount of capital invested in them. ABC analysis is a valuable and essential tool for companies looking to improve their supply chain and inventory management processes.

🤔 How do you choose which method to use?

• If you’re running a warehouse operation with thousands of SKUs (stock keeping units), making sense of what’s important can feel like trying to solve a Rubik’s cube blindfolded.
• And, by reducing your price to be lower than your competitors’ (or even offering the product at cost), you’ll move it more quickly and save money in the long run.
• Regular audits and reconciliations should also be conducted to verify data integrity.
• This facilitates seamless data flow across systems, improving the accuracy and utility of ABC analysis.
• In manufacturing, HML analysis aids in managing critical spare parts with high unit prices.
• If you focus on the 20% of patients, then you can come up with solutions that save money in the future.

Although they account for the majority of your inventory, making up 70%, C items only contribute 10% of sales. These are your top performers, the items that significantly drive sales. They represent about 10% of your inventory but generate around 70% of your sales. These products are critical to your business, attracting the most customer how to use abc analysis for inventory management demand and bringing in the bulk of your profits.

Increase visibility for your C grade inventory

You will then set different target service levels depending on this ABC classification. In short, you will hold more stock for the black tee shirt to ensure maximum service rate. And you will accept more risk of stock-out for the fancy one, to optimize your inventory turnover levels. Finally, if you’re ready, you can boost efficiency, streamline processes, and drive growth today by checking Inverge, our omnichannel inventory management system. The last hurdle to overcome is balancing the supply of ‘C’ class items with the demand for ‘A’ class ones. This issue crops up when folks misinterpret ABC categorization, thinking it means we should order high-cost (‘A’) items less often and stockpile those that cost less.

Category B:

For Category B and C items, you can explore multiple suppliers to find the best deals and reduce dependency on a single source. Retailers, manufacturers, or any other company managing a wide range of products can find a structured, data-driven way to manage their inventory with ABC Analysis. Therefore, you can include purchase prices, sales or demand volume, description and SKU codes as well as usage frequency in this data. ABC classification is a simple framework that allows you to prioritize what stock to focus on and how to manage your time. Adapting your purchasing and inventory policies for each group is good practice, such as setting up sophisticated ordering processes for all A items. For example, checking every purchase order and spending more time discussing lead times with suppliers to guarantee the best value and timely deliveries.

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The future data is needed, as you want to manage your Inventory Management System according to what will happen in the midterm. And the past values will mitigate the potential errors of the forecasts. Inverge is a platform with the solutions to unlock your business’ potential and the power to scale with you.

Bundle dead stock products with A grade or B grade products

• Category C items have the lowest consumption value and represent the majority of the inventory in terms of quantity but only a small portion in terms of value.
• What should be monitored with these is whether they should have production continued depending on if they are being sold enough.
• Category ‘A’ items are high-value inventory items with the highest annual usage value.
• However, later, she realized the demand for the products was seasonal, and she had invested a lot.
• This insight allows companies to provide exceptional customer service for these high-value items, enhancing customer loyalty and boosting sales.

This includes re-assessing your Class A, B, and C classifications quarterly or bi-annually based on the latest sales data, inventory turnover, and changes in customer demand. Adjust your strategies to reflect new patterns, ensuring that resources are optimally allocated to meet current needs. First, inventory management systems reduce human error by automating the whole range of processes related to stock tracking and order management. Barcode or RFID scanning, automated data entry, and real-time inventory updates eliminate manual counting mistakes (and save you loads of time). In manufacturing, HML analysis aids in managing critical spare parts with high unit prices.