Are You Underestimating Just How Far ABC Analysis Can Take You?

ABC classification can help you identify focus areas in your business by categorizing your product range by value and volume and applying the appropriate processes accordingly. Manage business inventories containing many different items more efficiently by using ABC classification systems. It allows you to classify your inventory and find high-value, quickly moving items that significantly impact your revenue and customer satisfaction.?

At AGR, we have previously covered the fact we have placed the ABC classification and subsequent service level targets in the hands of the user; read more about that here: Honing Your ABC Analysis - AGR Dynamics?

Many businesses are seemingly satisfied with how their supply chain is running. Most still rely on their ERP system's basic Min/Max features to manage inventory levels. However, there is always an opportunity to optimize your supply chain further.?

Turning your attention to the bigger picture of your business is an intrinsic part of your supply chain process. The more data available to input into the system you're using, the better the forecast and thus your ordering, which will help you cope with unpredictable circumstances in the foreseeable future. One way of doing this is through an effective ABC analysis and classification.?

But why is ABC analysis so important? It minimizes the risk of overstock and obsolete stock. It is not unusual to find that companies are overstocked on C items, the items that contribute the least to their bottom line, while at the same time, they are understocked on A items that contribute the most. Holding unnecessary inventory has a multitude of negative impacts:?

? Takes up space?

? Holds money?

? Hurts the economy??

? Harms the environment??

The last point is due to the excessive production of goods, as well as pollution caused by the transportation of said goods, most of which eventually end up in landfill that acts as a 'department store' for unnecessary goods.??

Incorrect forecasts and purchases all contribute to this. However, strategic purchasing based on multi-dimensional ABC analysis can help combat this. Let's take a look at an example:??

If a shop is selling pesto for ￡2.50 and then it is on offer to buy 3 for ￡6, you imagine that you would be making a huge saving through this offer as the price of each jar of pesto would be priced at ￡2.?

While this forecast is for three jars, let's calculate the true price of these pesto jars. If without discount, one jar is ￡2.50, and on offer, it's ￡2, then that's a 20% discount. However, if one jar becomes unavailable, the actual price becomes ￡3, giving you an overall price increase of 20%.??

Applying this logic to your supply chain, across multiple products, you can see how not having an effective ABC classification can be very costly. Therefore, how strategic pricing is calculated is crucial to your supply chain.?

McKinsey says:?

‘It may feel daunting, but upgrading supply-chain-planning systems is doable with the right approach. And the potential benefits are significant: better planning processes, systems that are a closer match for the company’s needs, and ultimately, a more efficient and resilient supply chain.’?

Combining ABC analysis on top of demand forecasting, inventory planning, and optimization helps achieve the visibility, control, and confidence that wholesalers and distributors need to respond to changes in demand and supply in the current world.?

?‘Technology moves really quickly, your brain doesn’t.’?

You can get in touch with us to find out more about how ABC analysis can help you optimize your inventory here:?

Contact Us - AGR Dynamics?