ABC analysis is a business technique that can be applied to any business unit whether it is inventory, suppliers, or even employees. In regards to inventory, it is used as a supply chain technique that is the building block of efficient inventory control. A categorization system is used much like the 80/20 rule of Pareto's Law (or analysis). The typical model of categorization or "banding" is annual consumption. The analytical goal is to identify the SKU's that will have a significant impact on overall inventory costs as well as identifying the SKU's that will require different controls and management style.
A look at the basic “rules:”
Annual Consumption Value = (Qty Consumed x Cost of Item)
Classify the results into three bands (A, B, or C)
- “A” Band = inventory that accounts for 80% of total value
- “B” Band = inventory that accounts for 15% of total value
- “C” Band = inventory that accounts for 5% of total value
It is important to remember that even though the “A” band accounts for 80% of the total value, it may be the smallest portion of the total volume.
Typical Results/Action Items as a result of the analysis:
- “A” class items are an important part of the product line. Due to the high value it will be identified that these items require close monitoring and tight management controls. Frequent cycle counts, security, low reorder levels, short lead time supplier, and Just In Time (JIT) replenishment are a few good actions to take for “A” items.
- “B” class items have a lower need to tight controls and generally only require standard inventory management practices. Standard action to be taken is monthly or quarterly cycle counts combined with an annual inventory count.
- “C” class items require the least amount of controls and in some situations are the promotional “freebees” that are accompanied by the high two bands.
Sounds easy right?? This can tend to be a loaded question. The ABC analysis is a basic practice of inventory and supply management BUT, it requires an efficient software package that produces data with integrity and quality. For example, Zenventory is an inventory management software solution that does a nice job of managing inventory using hybrids of the ABC analysis approach. Without easy to use software providing good data quality, the basic ABC analysis quickly becomes convoluted and diluted with unnecessary data elements.
10 ways Zenventory.com can help?
- Notify buyer of optimal reorder quantities for price breaks to keep overall inventory costs low
- Set, evaluate and adjust reorder levels based on turnover reporting tools
- Live, up to the minute stock level report on dashboard
- Color coded inventory screens to quickly identify stock level
- Avoidance of costly stock outs as well as the need to carry excess safety stock
- Identify item specific leakage risks based on ABC banding
- Set up warehouse bin locations based on item dwell and management controls needed.
- Set and evaluate supplier velocity and efficiency
- Reduce errors by seamlessly moving through the entire order cycle: Purchasing through Order Fulfillment
- Fully integrate with current Financial Management Software to perform live detailed financial analysis on inventory costs.
Put the ZEN in your inventory management practices by using an easy to integrate, user friendly, mobile, solution that provides optimization tools developed from industry needs rather than the out of touch models of yesterday – Zenventory.com
