The ABCs of ABC Classification

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Companies say that on-time, in-full deliveries and product availability are the two top priorities for supply chain management. Still, only 6 percent of companies have full visibility within their supply chains. What’s going wrong? Supply chain management isn’t rocket science, but most companies struggle to track products as they move from the warehouse to the shop floor. Could ABC classification provide a solution?

About ABC classification

ABC classification is a ranking system that lets you identify and group items in order of importance to segment your inventory into different groups. For example, you might classify your items into one of the following categories:

A. Extremely important items

B. Moderately important items

C. Relatively unimportant items

“ABC classification is closely associated with the 80/20 rule, a business metric that proposes 80 percent of the outcomes are determined by 20 percent of the inputs,” says TechTarget. “The goal of ABC classification is to provide a way for a business to identify that valuable 20 percent so that segment can be controlled most closely.”  Vanguard has found this to be true across many clients, and typically they did not realize it prior to the assessment.

For example, say you own a shoe company, and you want to deliver your products to retailers more efficiently. You can group all your items and place them in one of the three categories above to optimize your inventories:

A. Extremely important items: Shoes and accessories that you spend the most money on. These products provide you with the highest profit margins. Items in this category might include footwear from big brands like Adidas and Nike, or bespoke items that are popular with your customer base.

B. Moderately important items: Shoes and accessories that cost less than those in category A. These products have lower profit margins, but you should still pay attention to them. Items in this category might include mid-price footwear from second-tier brands.

C. Relatively unimportant items: Shoes and accessories that cost less than those in categories A and B. These products are not your highest priority; they include items like loss-leaders, discontinued stock, footwear from unknown brands, etc.

Benefits of ABC classification

ABC classification is a new approach to inventory management, and it might take some time to adopt. Done properly, ABC classification will provide you with multiple benefits:

  • Control your high-priority inventory: In a regular inventory management system, business owners see all products as equally important. ABC classification places a greater focus on high-priority items. Since these items provide you with the biggest profits, you need to monitor them closely. ABC classification lets you do this.
  • Forecast future sales trends: Once you incorporate ABC classification into your business model, you can make more accurate predictions about future sales. Organizing your inventory in this way enables you to identify trends and patterns in your sales cycles. For even more accurate insights, use good statistical forecasting software. These programs create statistical correlations and make forecasts about the future success of your business.
  • Improve customer service: Once you have prioritized items in your inventory, you can deliver different service levels for category A, B, and C products. You might want to reduce wait times for category A items, for example, as these provide you with the highest profit margins.

If you struggle with inventory management, ABC classification could revolutionize your entire business. This ranking method is a simple way to prioritize your products for a more effective supply chain.