ABC Analysis is a powerful technique that helps the organization to divide their products into 3 categories such as A, B and C to figure out which makes the bigger contribution to their revenue source.
Learn more about this analysis and how it can help you make better decisions.
What is ABC Analysis in Inventory Management?
The ABC analysis follows the Pareto Principle that was originated by economist Vilfredo Pareto. The ABC analysis states that 80% of the revenue comes from 20% of products or services.
The ABC analysis divides the subject into three categories: A, B, and C.
- Category A:
Those products or customers that are most valuable to you fall under Category A. In other words, these are the products that contribute substantially to your overall profit without consuming too much of your resources. Category A will reserve the most profitable products, which will be smaller in number.
- Category B:
This category represents your mid-range customers or products. In many organizations, this group is mistakenly seen as those who contribute less to the revenue and don’t receive a lot of attention.
In spite of this, category B offers a lot of potential. It is possible to develop members of category B into items of category A with a little encouragement.
- Category C:
In Category C, there are hundreds of little transactions that are crucial for profit, but don’t individually add much value to the organization. You will find most of your customers or products in this category. Moreover, to decrease overhead costs, this is the category where the organization automate sales as much as possible.
Benefits of ABC Analysis
- It is important to control high-value inventory in order to improve availability, reduce losses, and lower costs.
- Stock management resources can be used more efficiently. In stock counts, for instance, more resources are allocated to Category A and fewer to Category B and C, which saves time and money.
- Businesses can reduce stock outs by holding larger buffer stocks if they have relatively low values of B or C class holdings.
After reading this article, I hope you’ll be convinced that incorporating ABC analysis into your business strategy is worth your time and effort. The ABC analysis is a simple, informative way to calculate the rate of return on your business.
Not only it helps to figure out which is the most valuable product as per the revenue perspective. It also highlights which other product of Category B can be most valuable for the company in the near future.