Sep 12, 2016
Does your inventory need an ABC analysis?
Every day, we talk to people who manage inventory or are a C-level executive in their company who don’t know how to better manage their inventory. They frequently don’t even know where to start.
Does that ring a bell for you? If you warehouse your inventory, chances are you have a large number of products in your catalog. It’s quite difficult to manage a large number of products effectively.
Because it’s such a challenge, most people tend to proactively manage and review their inventory less frequently than they should. This leads to two problems:
- Because you only really do it occasionally, it becomes a really large job which you dread.
- Between the days that you review your inventory, there are always crises, which means you spend your time putting today’s fires out rather than planning ahead.
Wouldn’t it be so much better if you could spend a small amount of time every day managing the few inventory items that really matter?
Are you focusing your limited energy on the right products?
Imagine having a proper ABC analysis of your products that automatically gets updated every day. If this classification is assigned to your items and it’s visible everywhere, you would be able to know if the item you’re working with is worth the effort or not.
You’re probably well aware that you only have a finite amount of energy every day. If an alert comes up stating you’re running out of stock of an item, it would great to know if it’s a C item — which means you can put the task off for later. On the other hand, if it’s an A item, you know you need to attend to the item right away.
Classification can ensure the time and energy you spend on the A item will have the maximum impact, rather than chasing down less important items.
More than just human energy
There’s a lot more to classification than just prioritizing your efforts. Typically, companies have a limited amount of cash to invest in inventory. Wouldn’t it be good to know that the money you invest will actually bring you a good Return On Investment? Furthermore, the money you invest needs to work for your company now, not at some unknown point down the road. It’s usually bad policy to invest money into inventory that will only be sold in a year’s time.
Hopefully, you’re beginning to see that a proper ABC analysis will enable you to prioritize working capital and allocate it towards the items that make the most sales.
How to make an ABC analysis
Coming up, we will walk you through the steps to generate a proper ABC analysis. This will allow you to spend your energy on the 20% of the items that bring in 80% of the sales. Check back with our blog to learn more.