Why an ABC Analysis is not enough for your business
Performing an ABC Analysis of your products is important because it enables you to focus on the 10-20% of items that will give you 80% of your sales. An ABC Analysis enables you to:
- Focus on those items that are most important to achieving your business objectives
- Make range determination decisions, identifying items never to be ordered again (obsolete) and items which will only ever be ordered when a customer orders them from you (non-stocked)
- Set inventory policy, including target service levels and order cycles
How to perform an ABC Analysis
Step 1 is to remove the noise, by excluding obsolete and non-stocked items.
Your remaining items are then categorised by sales value, and flagged as:
- A: those items that contribute to 80% of total sales value
- B: those items that contribute to the next 16% of total sales value
- C: the remaining items
Typically, 10% (or less) of your products will comprise around 50% of your on hand inventory and yield 80% of your sales. Your A items are your most important items from a sales value perspective.
The problem with this approach
Items that are very cheap but sell thousands of units per month may end up being flagged as a C item in a value-based calculation. However, these items may be very important to your customers and to your manufacturing/assembly.
For example: you sell (or use) 10,000 washers per month, with a unit cost of 1 cent each. From a value perspective, they would definitely not contribute to the top 80% of sales value and would get lost in the C items.
While washers are clearly not important from a value perspective, being out of stock of washers might mean you have lots of disgruntled customers or your manufacturing/assembly line stops and you lose sales of expensive machinery.
NETSTOCK adds velocity for powerful insights
By combining a Velocity Analysis based on unit sales with the ABC Analysis, NETSTOCK categorises your washer as a high velocity C item.
Now you are able to focus in on products that are important to both your business and your customers.