What Is ABC Analysis in Inventory Management?

Not all inventory items stored in a warehouse have equal value. Some items are high value, others have high demand, and a few may be a mix of both. ABC inventory analysis is a technique that helps categorize such inventory items to help warehouse stakeholders better manage the highest priority items.

This inventory categorization technique usually groups the inventory in three buckets i.e. A, B, & C.

  • ‘A’ items: Most important to the owner of the inventory. This material should receive the most attention due to its high usage rate and/or or a high monetary value.
  • ‘B’ items: Items ordered somewhat often and/or those that have a moderate price range – hence less important than ‘As’.
  • ‘C’ items: Items that are ordered least frequently and/or account for the lowest proportion of the overall inventory value.

ABC Analysis in Inventory Management

Steps Involved In ABC Inventory Control

The Pareto Principle states that 80% of the inventory value come from just 20% of the inventory. This is known as the 80/20 rule and it helps shape the results of the ABC technique.

Steps Involved In ABC Inventory Control

The typical steps involved in ABC inventory analysis are:
Step 1: Determining the annual usage or inventory value for each item.
(INVENTORY VALUE = ITEM VALUE * ANNUAL CONSUMPTION)
Step 2: Determining the percentage of total usage/inventory value by item.
(ITEM % OF TOTAL INVENTORY VALUE = INVENTORY VALUE / SUM OF ALL INVENTORY VALUES)
Step 3: Ranking the items from highest to lowest percentage.
Step 4: Classifying the items into groups.

  • Group the parts that account for the highest 80% of total inventory and allocate them as ‘A’ items.
  • Group the parts that account for the next 15% and allocate them as ‘B’ items.
  • Group all remaining items as ‘C’.

Advantages of ABC analysis

ABC analysis is thus a simple framework to identify those items in the warehouse that are the most important and should, therefore, consume most of the attention in terms of stock takes and inventory management. Below are the benefits of ABC analysis:

Better forecasting: ABC analysis of inventory helps effectively forecast demand by splitting the inventory into categories that are based on customer demand and business value.

Strategic planning: After analyzing the inventory and sorting it into A, B, or C categories, it is easy to identify which products need more focus on buying and planning.

Smarter negotiations: Since items in category A are likely to be ‘best-sellers’, warehouse managers and stakeholders can raise the prices of those products for increased revenue.

Limitations of ABC analysis

Whilst ABC Inventory Management is an easy way to prioritize inventory, it also has a few limitations.

ONE-DIMENSIONAL

The ABC classes are 1-dimensional as they only take into account one variable, such as sales value. Other factors such as demand variability, profit margins, long-term growth, or the effect of risk-of-runout are equally important to consider during categorization. Thus, application of ABC analysis is not suitable for small organizations where the costs of materials do not vary significantly.

STATIC

ABC analysis lacks dynamism. In a marketplace where trends come and go and product sales can be erratic, items can move from category C to A very quickly. Without constant analysis, ABC classification groups can quickly become out of date.

TIME CONSUMING

With the risk of ABC categorization becoming obsolete, it can be time-consuming to constantly re-evaluate As, Bs and Cs and look for signs of movement between the groups. Inventory management teams have to spend more time on classifying the inventory than acting on the inference of the results.

Advantages of ABC analysis

One way to overcome some of the shortfalls above is to use the latest technology to automate and speed up the inventory scanning process. This can help warehouse managers utilize their time for high priority tasks like inventory forecasting and strategic planning.

Autonomous Inventory Drones

An optimal solution to enhance the performance of ABC classification systems is the deployment of autonomous inventory drones. As the counting frequency of the ‘A’ category items is relatively high, dedicated cycle counting manpower is needed for this task, which can result in a significant increase in the inventory management cost.

The advantage of automating inventory scans via drones is that aerial inventory scans can be done inside a large warehouse or distribution center without disrupting any ongoing operations and without requiring any infrastructural changes.

The risk of ABC categorization getting obsolete can be overcome by using inventory drones paired with intelligent software. Fleets of drones can perform these repetitive tasks seamlessly, quickly, and accurately; they can broadcast real time inventory data to the warehouse management system.

Apart from the ability to count inventory at a higher frequency, inventory drones provide additional benefits such as:

  1. Date-wise and location-wise image archives, useful for audits.
  2. On-demand inventory scans and SKU checks
  3. Put-away audits
  4. Empty bin detection and audits
  5. Scanning pallet barcodes in VNA racking without having to rely on expensive swing-reach trucks.
  6. Reduction in cycle counting accidents in the warehouse.

Another important factor that should be taken into consideration is the RoI of an aerial inventory scanning solution; these can offer payback periods as short as 9 months.

One such solution is FlytWare, tested successfully in warehouses, and DCs across the globe for autonomous aerial inventory scans. To deploy the FlytWare solution at one of your facilities, reach us at flytware@flytbase.com. For more details, visit www.flytware.com


FAQ (Frequently Asked Questions)

Q 1: What is ABC analysis?

ABC analysis in material management is an inventory categorization technique. The inventory is grouped into three categories (A, B, and C) in order of priority, based on the premise that the assets owned by an organization are not all of equal value.

Q 2: What is ABC analysis with regard to inventory control?

ABC analysis in inventory control is an approach for classifying inventory items based on the items’ business values, in order to optimize inventory control and management practices.

Q 3: What is ABC inventory classification?

The classification of inventory is in 3 groups i.e. A, B, & C.

  • ‘A’ items: Most important to the owner of the inventory. This material should receive the most attention due to its high usage rate and/or a high monetary value.
  • ‘B’ items: Items ordered somewhat often and/or those that have a moderate price range – hence less important than ‘As’.
  • ‘C’ items: Items that are ordered least frequently and/or account for the lowest proportion of the overall inventory value.
Q 4: When would an ABC inventory system be appropriate?

ABC inventory system is appropriate for big organizations or warehousing companies that have a wide variety of products stored in rack or bulk configuration.

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