The ABC analysis is a methodology of inventory management that sets three categories for items in descending values. Which means, items A have highest value, B have a midterm value and C the lowest value.
It comes from the Pareto Principle, where 80% of sales volume are generated from the top 20% items. Therefore, those items will generate 80% of the revenue.
But how can that methodology help inventory managers? What are the benefits and advantages? How does it work?
The benefits of ABC Analysis
The ABC Analysis methodology can help professionals of supply chain because it shows which items should get more attention during planning and inventory management.
It also helps integrate the whole stock to evaluate how each category of items impact on finances. Doing that defines how to treat each category during operation.
That means, more critical items are always on stock, because they are harder to get, rarer and usually have a higher cost because of its importance to production.
As the other items are easier to acquire, planning prioritizes those items because it helps on the financial point of view and makes inventory management more efficient. It also reduces excessive stock and stockouts.
How are the Inventory Policies on ABC Analysis?
The first step is classifying the items in the categories A, B and C. After that, you need to define which treatment each one of the groups will receive. Usually it follows the rule:
- Category A: as the more critical category, it must have a strict control of stock; It must be placed in secure and easier to reach spaces; It must be checked frequently to avoid running out.
- Category B: there is no need to a strict control as category B, but also needs regular checking; It is the middle ground between categories and may become more important during the process.
- Category C: they don’t need to be checked with the same frequency than categories a and b; Keeping a minimum stock usually is enough, because it’s easier to order.
Disadvantages of ABC
The ABC analysis is a very solid method that can help companies in a lot of ways and a lot of segments. From a small organization to big warehouses complexes the method can help optimize inventory.
But even with its advantages and successes, the method also has it flaws. For instance, you must be able to have the right standardization of your stock and the materials needed and stored.
If you don’t do that, and set wrong categories, you’ll face problems in production and will have a lower profit, may even lose transactions and clients if you can’t answer fast enough.
So, it requires an already established system of standardization and coding of the materials. Without a strategic plan, you won’t be able to analyze your inventory to define values and categories.
Finally, it takes into consideration the financial aspects of stock from the value of items. Since it ignores other aspects that may impact you, you’ll always need to search for points that may be causing problems.
The ABC Analysis methodology offers a good stock management and inventory optimization, it reduces investments and therefore increases profit at the end of operations.
It also provides the opportunity for the manager to focus on important aspects of the supply chain and the operation, while keeping stock healthy and functional.