THE IMPORTANCE OF THE ABC ANALYSIS

Over the years, we have found many companies that have thousands and thousands of SKUs, but does it help companies to be more profitable? Maintaining so much inventory can have the opposite effect.

So how can companies reduce their inventory while improving service? An important point for this is to perform a sharp ABC analysis. In the following article Knowledge, we invite you to the world of ABC analysis and thus maximize the value of your inventory.

HOW CAN ABC ANALYSIS BE USED TO ACHIEVE THE GOALS?

According to the Pareto Principle: 80% of billing is generated with only 20% of the assortment. Consequently, the disadvantage of having a large variety is that many companies invest too much time in inventory management that ultimately has a small impact whereas neglecting the SKUs could make a positive change.

When it comes to deciding the optimal level of inventory to maintain, Supply Chain Managers have to trace the line somewhere. However, to reduce inventory costs without affecting customer satisfaction, companies need a large amount of information. And, this is where the ABC inventory analysis comes into play!

ABC ANALYSIS

The ABC inventory analysis is defined as the process to examine the inventory to determine exactly how much to maintain. With the information provided by this analytical approach, companies can identify significant opportunities to reduce inventory levels.

ABC / XYZ is the most common form of inventory analysis. It's where the inventory is divided into three main categories based on its strategic importance. The 'A' are essential products and require strict control, while the C items are the least important products.

  • Articles A: products that are important and therefore require strict control.
  • Articles B: products of minor importance but that still have to be managed with a medium level of control
  • Articles C: minor products that require the simplest and simplest level of control.

Once the products are grouped, each category will be managed differently, being necessary to devote more attention and resources to the articles of class A, less to those of B and even less to those of group C.

ON WHAT CRITERIA SHOULD YOU BASE YOUR ANALYSIS?

First, it to consider;  that applying the same inventory strategy throughout the assortment is not profitable or logical. By using the categories identified through a precise inventory analysis, you can begin to take a more personalized approach to manage each item.

However, before taking full advantage of the inventory analysis, what parameters should you use to determine the product categories? On what basis should you decide if a product is an article A, B or C?

It mainly depends on what KPIs are most important to your business. If the objectives of your inventory are based on financial factors, the focus should be on the profit margins of an item. However, if customer satisfaction is more important, line items should be used to build appropriate limits.

Once the inventory analysis has been carried out and revised, its assortment can be classified into different groups. To shape an effective strategy in the future, knowledge must support all inventory decisions.

To learn more about  ABC analysis, go through our article on the five steps to increase the profitability of the assortment. With these tips, you can help improve the profitability of the assortment, minimize risk and effectively manage inventory.

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