ABC Analysis: The Daily Definition
What is ABC analysis?
ABC analysis is a method used to classify items in a business’ inventory. Using this method, warehouse managers rank various items in their inventory into three categories based on how much they contribute to a specified business goal. This is also often used as a method of prioritizing their products.
We’ll look at an ABC classification scenario that uses an item’s sales as their measurement of value. Matt wants to run an ABC analysis to decide if it’s time to phase out some of their products due to low demand. He uses his sales history data to look up how much revenue each item brought in. He sorts them from highest number of sales to lowest number of sales.
After this, he sorts them all into three categories — A, B, and C. The “A” category is for the biggest contributors to overall sales. Since Matt follows the Pareto principle, which says that 80% of his revenue should come from 20% of the products, this group of products becomes classified as the most important. Matt continues down the line, determining the thresholds that separate his “B” category (mid-level contributors) from his “C” category (the lowest level contributors).
Our two cents:
It’s important that your warehouse staff regularly takes the time to assess the value of your inventory. It’s a great method not just for prioritizing your products, but also in deciding ideal warehouse layout options. Sorting your products by ABC classification gives your warehouse more structure. This means that it’s much easier to locate items when picking and packing orders.
A well-structured warehouse makes every other aspect of your operations smoother. If you’re looking for more best practices for organizing your warehouse, jump over to our warehouse layouts ebook.