What Is ABC Inventory? (With Benefits, Steps and an Example)

Benefits of ABC inventory analysis

An ABC inventory analysis has the following major advantages:

What is ABC inventory analysis?

Companies use an ABC inventory analysis as a tool to evaluate the value of their products to their operations. Businesses frequently carry out this kind of analysis for various time periods because their value may change over time. People frequently apply the Pareto principle when conducting an ABC analysis. This is the notion that only 20% of an organization’s efforts or products yield 80% of its results. Companies are urged to identify the 20% of their products that generate the most revenue using this inventory analysis technique.

Inventory managers can categorize their products into three categories by ranking items according to their cost, demand, and risk factors:

How to calculate ABC inventory

If you want to determine ABC inventory, you can do so by following these steps:

1. Define your goals

Consider the advantages of an ABC inventory model and consider your potential goals. For instance, you might want to decrease the amount of money you spend on suppliers or boost your cash flow. When you optimize your inventory, try to set target percentages for these objectives that you can monitor.

2. Gather inventory data

You might need to collect numerous data points for your products, depending on your goals. Compile the overall sales information and your spending for each item. This can include the price you pay for the item, the cost of ordering it, and the shipping fee. If one of your goals is to raise this number, it would be ideal if you could collect the gross profit margin for each item.

3. Perform the ABC analysis calculation

You can give each item a value that you can use to rank it in one of the three categories. First, calculate the consumption value:

Cost of an item x the number of units sold equals consumption value.

When you have these numbers, arrange them in a table in decreasing order of consumption value. You can determine the total consumption value of your products by adding each of these consumption values together. For each product, calculate the percentage of the total. You can also determine the ratio of units sold to the total number of units sold. You can use these percentages to group your inventory by consumption value.

4. Categorize your items

You can classify each product as A, B, or C once you know its consumption value. Using the Pareto Principle, consider the following parameters:

This can assist you in forming an understanding of the overall worth of your products and how they contribute to your business. The percentages can vary slightly because this is just meant to assist you in developing ordering strategies and inventory control procedures for various products.

Example of ABC inventory

Here is an example of an ABC inventory calculation:

Small Town Shoes wants to use the ABC method to analyze its inventory. The inventory first collects the price of the goods and the number of units they contain:

They multiply the two figures together for each to determine the impact on consumption, then they rank the results from highest to lowest:

The total consumption value is $51,500. Each has a percentage of:

These percentages indicate that the top four products fall into category A, which accounts for approximately 79% of the consumption value. The following two will be category B, accounting for roughly 14% of consumption value. The final two items fall into category C because they make up about 7% of the total. The inventory manager will use this information to bargain for lower supply prices for women’s dress shoes, men’s sneakers, and men’s and women’s boots.

What is ABC Inventory Analysis?

FAQ

How do you classify ABC inventory?

1. Step 1: Gather All Inventory Data. …
2. Step 2: Find The Total Value of Each Item. …
3. Step 3: Calculate the Total Value of Your Inventory. …
4. Step 4: Determine the percentage of value that each item in your inventory offers.
5. Step 5: Classify Your ABC Inventory.

What does ABC analysis stand for?

An inventory is broken down into three categories using the ABC analysis: “A” items have very strict controls and accurate records, “B” items have less strict controls but still good records, and “C” items have the most basic controls and fewest records.

What is the ABC analysis with example?

There are four main categories of inventory: finished goods, MRO, WIP, and raw materials or components.