ABC analysis is a technique in an inventory management which helps in classifying the value of inventory items based on their criteria or the importance of the products to the business.
Three main criteria’s on basis of which they are classified are demand, cost and risk. Store Managers or Inventory Managers group these items into different classes based on the above criteria.
This also helps company to understand the most successful product which is in demand and contributes highest in profit sharing of the business.
This is also known as Always Better Control, as this analysis helps to have sufficient stock as per the demand and thus helps companies to earn profit with a systematic and calculative way.
Now let’s see how it is calculated?
Multiply the annual sales of specific item by its cost, this will give the status of products which needs are high on demand and needs to be stocked; also will help to analyze the products which yield less profit. Accordingly company can take a call on having structured approach.
Number of items sold in a yr. X Cost per item = Annual value of sold product
After identifying the value of each product with the help of Pareto Analysis i.e with 80/20 rule, it will be easy to conclude the ranks and can accordingly place them under the classes made which is “A”, “B”, “C”
Let’s identify Strengths v/s Shortcoming with the help of an example;
Categorize the inventory (products) according to the value and importance.
High valued items in class “A” – Disinfection products >> Sprays, Handwash, Soaps, Floor cleaners etc
Average valued products in class “B” – Antiseptic products >> Original Dettol liquid,
Least valued material in class “C” – Band aid / Handplast, Skin care products, Bandage