ABC Analysis Of Inventory

Major impact on the economy for a longer period of time than originally anticipated

The ABC analysis of inventory is a commonly used inventory categorization methodology. It is rooted in the popular axiom, a small percentage of items contribute most of the revenue/profit, this is a crude translation of Pareto’s principle (also known as 80/20 rule).

The ABC analysis classifies inventory into the most important, or category “A” to the least important category “C”. Of course, many organizations do not stop at “C” but continue to classify into more categories. The general idea remains the same, “A” is most important, followed by “B” and so on and so forth.

Reason why ABC analysis is important

The reason ABC analysis is important and such a prevalent practice in retail is due to its simplicity and also because it reinforces the focus required on the inventory category that contributes most.

How is ABC analysis done

There are a couple of simple factors to consider:

Once the above two decisions have been made, it is relatively easy to do the ABC analysis. You can use a spreadsheet if the number of SKUs is relatively small or use a database query or any of the visualization tools to do this analysis. You just need a sorted list of the items with their relative score in the next column.

What next?

Once the analysis has been done, you will find the top SKUs or products that drive maximum business for you. Once you have the list of (let’s say 20-30 products), the next step is to align business actions to these select products, for example:

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