Somnath Mukhopadhyay

ABC Analysis Overview-
 
ABC Analysis aka ABC Classification is crucial driver when it comes to material management. Inventory categorization is done through this method and it is helpful in classifying the inventory primarily into three salient categories basis revenue generation. This also helps to identify the essential products in stock and thus prioritize the management of the same on the value. Analyzing inventory is based on the principle of Pareto, a popular economic theory, which signifies that optimum growth occurs only due to a small part of the economy. The relation between input and output has always remained unequal. Pareto Principle denotes that 80% of the sales volume is generated from the top 20% of the items. In any group, following the 80/20 rule, there are significant few and insignificant many.
 
Category of ABC Analysis -
Theory - All inventory items can not have similar or equal value. There are three categories
X - Products included in category X are one of the most important stock items having the highest value. It is also the smallest category that has minimal products. Y - Mid level category that has products of slightly higher value and less tightly controlled goods  are recorded. Items included in category Y are bigger in volume but of lesser utility compared to category X. Z - Usually Z is a general category that contains the largest volume of inventory goods containing the least value in terms of generating business revenue. These products would need the simplest controls and minimum records.  ABC Analysis Calculations -
Calculation is done in 5 steps - for both individual product groups or a wide range of inventory.
Annual no of product gets multiplied wit each item's cost, and note the utility of the product Create a category of each product (descending order) on basis of usage value Sum up the usage value of the products, include total no of items Get the percentages (cumulative) of items sold and annual consumption value Divide the data into three categories, using an approximate ratio of 80:15:5 Criticality in Inventory management -
Helps analyzing customer demand targeting particular product category Streamlines and optimizes the inventory process Supplier gets conducive negotiation Offers possibilities of strategic pricing of the products Customer service level enhancement Resource allocation made easier  
Shortcomings of ABC Analysis -
New Products - Using the product's sales metrics to identify which level it belongs to in the model. However, it is difficult to classify the new products as there is no historical sales data to examine. Seasonality - Holidays and weather - significantly affects the ranking of certain products. During the winter season, warm clothing products may be categorized as an A item, however - during the summer, the same would be brought down to the C rank. How to overcome - Classifications to continually evolve and get adapted every given period. Blindness - The ABC analysis depicts a product's importance, how often it is sold and how much revenue they are bringing into the company. Still, there are many factors that will eventually contribute to a product's importance. However, the may not have a large effect on a brand's profitability and good will. They will not rank high in the model. How to overcome - Example - A retail store can have specific products in display. it will help attracting customers. If these items need to be set with higher rank (analysis) and business owners to continue to substitute them with new ones in the display to to have more footfall in the store.

PEST Analysis is known to be a strategic framework that is used to assess the external environment for a business by drilling down opportunities and threats into Political, Economic, Social, and Technological factors. This analysis has evolved to be an effective framework to utilize in corporate strategy planning, handy in identifying the pros and cons of a business Strategy.
 
Example: COCA COLA
 
1. Political Factor - FDA tests Coca Cola products. It must follow the rules particular to a country. It should also supply the local stores with the best beverages. Countries can very well prevent it from distributing the products if all rules are not obliged. Rules can relate to accounting, internal marketing, labor or taxes.
 
2. Economic Factor - Coca Cola has its customers around the world. The company has its production units in various countries. It prioritizes its customers’ tastes and preferences. Revenue comes from the beverage sales.
Of late, people have started choosing healthy drinks. Coca Cola has noted it and has been moving in that direction.
 
3 Social Factor - Urban areas are targeted as major market. There are more than 30 types of flavors in Japan. Same is the case in China. US is more focused on healthy products. Water and teas are also some of the well known products that are under this category. Coca Cola can use the same approach in the countries like Japan and China.
 
4 Technological Factor -  Use of new technologies can make Coca Cola very effective. It can help it in manufacturing a large number of quality products. The technological set up in Britain has helped ensuring that customers get the finest products in a short time. Coca Cola has also social media presence, that helps in increasing its popularity. Its promotion campaigns have been very popular on various social media platforms.
 
5 Legal Factor - The company has secured all the rights of its business. It has obtained the rights of all the past and future products with a patented process.
 
6 Environmental Factor - Water accessibility is quite essential to Coca Cola for manufacturing its products. If there is no water accessibility, then they can’t operate. It also need to be ensured that water processing is environment-friendly.