Benefits of an ABC Analysis in Inventory Management

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As you manage the inventory for your business, there are several strategies you may use to help enhance your understanding of the inventory you need to have on hand and how to best manage your overall inventory needs, from seasonal changes in inventory to the regular stock you need to keep on hand for your business. One key strategy is ABC analysis. 

ABC Analysis for Inventory Management: The Basics

An ABC analysis strategy determines which inventory items are most essential based on their overall importance to the business, giving more weight to the items that are essential to have on hand and less weight to items that may not prove as essential in the long run. 

Each business may decide on how many classification levels it wants to give its inventory. For example, you might have five levels of classification, which run from A to E in importance; or you might choose to use a simple A-C classification system.

Suppose, for example, that you choose to use the three-tiered A-C system. “Class A” items would include items of the highest importance for your inventory: the items that you sell the most often, for example. “Class B” items would be slightly less vital, but, in some cases, still very important to the business. “Class C” items, on the other hand, might be less essential to overall customer satisfaction or business operation. 

Assessing the Value of Your Items

There are strategies you can use to assess the value of items in your inventory. 

The easiest way is to calculate the overall financial value of the item: average units sold each year times the cost per item, which will give you a reasonable estimate of the usage value of the item. Then, you can order your inventory based on that assessed value.

The Benefits of ABC Analysis in Inventory Management

ABC analysis for inventory management allows several key advantages as you are determining what inventory you need to keep on hand and how much of it you need to be able to access at any given time. 

1. Allocate Resources More Strategically

When you know what your highest-value items are–especially if they are different from the highest-volume items–you can focus your efforts more strategically. If you are struggling with potential supply chain shortages or other challenges, you will know where you need to allocate potentially limited resources to the greatest effect.

2. Manage Product Lifecycle Over Time

By regularly conducting ABC analyses of your inventory and products, you may find that you’re able to more effectively determine where your product is in its overall lifecycle and maintain better inventory forecasting

Is a product growing in importance? Declining? By keeping a close eye on those changes over time, you can shift your inventory to meet the changing needs of your customer base, whether that means keeping more of an item on hand as it grows or nears maturity, then decreasing your overall inventory when demand for the product begins to decline. 

3. Optimize Your Inventory

You may have limited warehouse space for storing your inventory, or limited space for storing inventory at a particular location. With ABC analysis of your stock, you can more effectively optimize your inventory, making more room for the items that are of the highest value to your customers and your business while decreasing the space dedicated to items that are less important. Inventory optimization can be increasingly important when dealing with supply chain challenges or short warehouse space, both of which can force you to focus on the areas that are most important to your business.

In many cases, inventory optimization can also help significantly with warehousing costs. Since you can  optimize your inventory based on your priorities, you can often decrease warehousing space and expenses for items that are less important to your business. 

4. Prioritize High-Value Inventory

Your ABC analysis allows you to prioritize the inventory that is of the highest value to your business. The Pareto Principle suggests that approximately 80% of the results for many scenarios, including business success, will come from around 20% of your efforts. In many cases, around 80% of your results may come from those Class A items in your inventory. By focusing on those items, including offering additional protection around the highest-value items or focusing on ensuring that you have a steady flow of stock for those items, you may find your business outcomes improving. 

5. Simplify Your Efforts

The ABC analysis system makes it much easier to simplify overall inventory management. Often, inventory managers have a hard time determining what items they most need to prioritize or when they need to bring in more of a certain type of item. With the ABC analysis method, on the other hand, many inventory managers find that they can more clearly identify exactly the items they need to focus on.

6. Offer Better Service to Your Customers

The items that have the highest value for your business are often the ones that have the greatest overall value for your customers. Your ABC analysis allows you to focus on keeping those critical items in stock, which means you will be in the ideal position to provide a higher, more efficient level of customer service to your customers. 

7. Manage Your Pricing Effectively

As you conduct your ABC analysis of your inventory, you can keep a closer eye on the overall demand for your products. As demand increases for a specific product type, you may find that you can increase your pricing and generate additional profit. As demand starts to wane, on the other hand, you may want to adjust your pricing to help you clear outer extra inventory. 

Using the right system for your inventory management is critical. With Stock IQ, you can more effectively manage and track your inventory, keeping up with sourcing, available warehouse space, need for specific items, and more. Contact us today to learn more about how we can help you improve your inventory management strategies.

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