ABC Analysis 80 20 Rule in Inventory Management

4PL providers act as strategic partners, overseeing multiple 3PLs and other service providers to optimize supply chain operations, enhance efficiency, and achieve cost savings for their clients. Such products are carefully managed by companies within the warehouse and throughout the supply chain to maintain availability and meet customer demand. It is through ABC analysis, some authorities believe, that clerical costs are reduced. ABC analysis helps better planning and improved inventory turnover is assured. Preferential treatment to vital items through concentrated alienation under the ABC system of analysis of inventory is the panacea for the cure of a number of ills plaguing an organisation.

This is because the analysis is carried out after collecting relevant data like price per unit about products. With this tool, you can quickly analyze inventory data, determine which items should be prioritized, and optimize purchasing decisions based on real usage patterns. These are the high-value, low-quantity components that must be monitored closely to avoid costly downtime. Meanwhile, C-items make up the bulk of inventory but hold little financial weight, making it more practical to stock them in large quantities with minimal tracking. Even though bolts are used frequently, the motor holds more financial weight in inventory planning.

The Benefits of ABC Analysis in Inventory Management

The above graph states that the items in category ‘A’ cover a small portion based on the number of units in the inventory but constitute a significant portion of the inventory value. The items in category ‘B’ have a moderate contribution to quantity and inventory value. The items in category ‘C’ cover a significant portion of the inventory in quantity but have a tiny contribution to inventory value. Let us take the example of Susan, who is engaged in the retail sale of handbags.

• B-items should have balanced stock replenishment policies, while C-items can be purchased in bulk and tracked with minimal administrative effort.
• For over a decade, Panni has helped companies transform their business to become more efficient, agile and profitable.
• This method helps businesses optimize their inventory control processes, reduce costs, and ensure that critical items are always in stock.

What to Do With A Grade Items in ABC Analysis

This article has been researched & authored by the Business Concepts Team which comprises of MBA students, management professionals, and industry experts. The content on MBA Skool has been created for educational & academic purpose only. Typically “A items” consist of minimum amount of items but these items account for a major proportion of value for the organization and so on with the other items. This analysis works under the assumption that all inventories are not of equal value to the organization so they need to be treated differently. A typical ABC analysis classifies the inventory based on the following table.

Streamlined Procurement Processes

Because of the high value of these items, frequent value analysis is required. In addition to that, an organization needs to choose an appropriate order pattern (e.g. “just-in-time”) to avoid excess capacity. ‘B’ items are important, but less so than ‘A’ items, although more important than ‘C’ items.

Category B: Moderate-Value Items with Moderate Frequency of Sales

• For example, an ABC analysis example might show that high-end electronics make up a significant portion of revenue, justifying closer monitoring and control.
• Rational use of items in this subgroup, including their removal from the list if possible, can bring about substantial savings without affecting patient care.
• In summary, ABC analysis involves placing inventory in categories according to benefit and use.

Freight visibility (also called shipment visibility) refers to the ability of supply chain professionals to track and monitor the movement of freight shipments throughout the supply chain. It involves gaining real-time insights into the location and status of goods as they move through various transportation modes and stages of the logistics process. An Electronic Product Code (EPC) is a unique identifier used to distinguish individual items, cases, or pallets in the supply chain. It serves as a digital identifier that provides a standardized way to track and manage products throughout their lifecycle, from manufacturing to distribution to retail. A container rollover occurs abc analysis abbreviation when a shipping container is not loaded onto its scheduled vessel and is instead ‘rolled over’ to a subsequent vessel.

ABC Inventory Analysis is built on the Pareto Principle, which states that 80% of outcomes result from 20% of inputs. In inventory management, this means that a small percentage of stocked items account for the majority of inventory costs and operational impact. Once you’ve calculated the essential metrics for each product, rank them based on their annual sales value.

Setting the right price for a product is never easy and ABC analysis isn’t the only variable to consider when increasing or decreasing prices. That being said, it’s worth reassessing A products to see if there’s room for a price increase. They’re the most popular products you have and your customers might be willing to pay a little more to make sure they don’t miss out. If you start to see a big increase in demand for a particular product, it might be time to reassess your pricing. You need to be careful not to overcharge and to keep ahead of the competition but there could be scope for increasing your prices on certain items. In contrast, C items should take up much less of your time and could be ordered automatically to save valuable human resources.

Likewise, our category B items were a bit under the 20% parameter set for the category—but it was 30% of our total items. Sort products (within your Excel spreadsheet or whatever tool you’re using) from highest usage value to lowest. Find the usage value of each item by multiplying the number of units sold by the total cost per item. You can use the ABC XYZ analysis to better determine the items’ safety stock.

For C-class items with low consumption value, you do not need a lot of safety stock by definition. On the other hand, having an item with low but constant demand would be classified as a C-article. That means we are going to need to account for the various levels of uncertainty in consumption. In conclusion, while ABC analysis is a useful framework for inventory management, its effectiveness can be limited by several factors that businesses need to account for. ABC analysis is a popular categorization technique used in inventory optimization.