How can you achieve your supply chain goals through better ABC inventory analysis?
5 top tips to maximise the value of ABC inventory analysis
Over the years, we have encountered many businesses that hold thousands upon thousands of SKUs. But has this helped them to become more profitable? In reality, holding so many items can have the opposite effect. So how can more insightful ABC inventory analysis help businesses to reduce their inventory whilst improving service?
How can you utilise ABC inventory analysis to achieve your supply chain goals?
As per the laws of the Pareto principle: 80% of the turnover is generated by just 20% of the assortment. The disadvantage of having a large assortment is that many businesses simply invest too much time in managing inventory that has only a small impact whilst neglecting the SKUs that could make a positive change.
When it comes to deciding upon the optimal level of inventory to hold, supply chain managers have to draw the line somewhere. In order to reduce inventory costs without impacting customer satisfaction, businesses need a huge amount of insight! Thankfully, however, this is where inventory analysis comes into play!
ABC inventory analysis is defined as the process for examining inventory in order to determine exactly how much to hold. With the insight this analytical approach provides, businesses can identify some huge opportunities to reduce inventory levels.
ABC/XYZ is the common form of inventory analysis. This is where the inventory is divided into three core categories based on their strategic importance. ‘A’ items are products that are important and require tight control whereas C items are products of lower importance.
- A-items: products that are important and thus require tight control
- B-items: Products of lower importance but must sill be managed with a medium level of control
- C-items: Products of lower importance that require the simplest and easiest level of control
On which criteria should you base your analysis?
Should two different products with different demand patterns be managed in the same way? Applying the same inventory strategy across the entire assortment is neither profitable nor logical. Using the categories identified through accurate inventory analysis, you can begin to adopt a more tailored approach to manage each item.
However, before you can exploit the potential of inventory analysis, what parameters should you use to determine product categories? On what basis should you determine whether a product is an A, B or C item?
This will depend heavily on what KPIs are most important to your business. If your inventory goals are based on the financial factors, the focus should be on the profit margins of an item or the turnover. However, if customer satisfaction is more important, order lines should be used to build appropriate boundaries.
Exploiting the value of portfolio analysis
Once the inventory analysis has been carried out and reviewed, your assortment can now be categorized into different groups. In order to shape an effective strategy going forward, the insights should underpin all inventory decisions.
To help you maximise the value of inventory analysis, here are 5 top tips to ensure you achieve your supply chain goals.
Tip 1 – Differentiated service levels are key to achieving the right service level
A service level is the target % of all ordered units of an item that can be delivered from stock at the first requested delivery date. As stock increases, the service level increases. However, poorly considered service levels will lead to excess which ties up vital working capital or poor customer satisfaction due to stock-outs.
Effective inventory analysis shows that “A” items require a higher level of service than “C” items. To be able to realise your inventory goals, it’s essential that these service levels are well thought through.
Tip 2 – Determining your optimal stock levels
Once an appropriate service level has been defined, you can now re-assess your inventory policy. A items are going to have a greater requirement for safety stock as running out of stock could cost the business. B & C-items, while still important, can often be the root-cause of inefficiency. Given the lower requirement for safety stock, optimising these product categories can go a long way in achieving your goals.
Tip 3 – ABC Inventory Analysis to make better stocking decisions
If an item does not offer enough margin to justify holding the stock, business leaders must consider whether this item should be included as part of their stocked range. However, this decision is often political and thus, should not be taken lightly. Thankfully, this is another area where where ABC inventory analysis can help.
Want to achieve “quick wins”? Utilising the insights from the portfolio analysis will decide whether or not to change the stocked status of an item. By providing clear insight into the performance of each product categories, ABC inventory analysis can help businesses to launch a focused range rationalisation programme.
Tip 4 – Prioritise your future inventory reduction opportunities
Conducting regular ABC inventory analysis will help in realising further inventory improvement opportunities. After all, this is a great starting point to highlight which areas require the most attention or could deliver the greatest return.
The following areas are just a few examples of additional inventory improvement projects you could achieve through ABC inventory analysis:
- Renegotiate lead times
- Work with suppliers to agree more suitable order quantities
- Identify more effective means of managing specific items
Although these tasks seem simple, they can have a major impact when executed across the entire assortment. This will help improve availability, reduce inventory costs and improve efficiency.
Tip 5 – tracking and reporting
Through applying the four steps above, you will see a massive inventory reduction. However, in order to both understand how your inventory position is evolving and to communicate this to the wider business, its vital that you are able to monitor performance. Using ABC inventory analysis, you can benchmark changes and track improvements. As a result, you will gain a better understand of exactly how your strategy is performing.