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The ABCs of ABC Analysis

Hildur Fridriks
Published on:
March 10, 2023
In supply chain management, ABC analysis is a valuable tool that allows companies to classify their inventory based on its value and demand. This method enables them to focus their efforts and resources on the most important items, maximizing their profitability and minimizing the risk of stockouts.

Here are the ABCs of ABC analysis in supply chain management:

A is for Analysis

ABC analysis is a process of dividing inventory into priority categories based on given criteria, whether that is revenue, sold quantity, profit, sales lines (pick), cost price, and cost of goods sold (COGS). A basic one-dimensional ABC analysis divides all items into three categories, A, B, and C, based on the most important criteria. The A category includes important items that require tight control, the B category includes lower-importance items that require medium control, and the C category includes low-importance items that require simple control. For deeper insight, it is necessary to use a multi-dimensional ABC that takes two or more criteria into account.

B is for Benefits

ABC analysis helps companies to identify their most valuable items and prioritize them in terms of stock management and procurement. By focusing on high-value items, companies can reduce their inventory carrying costs, avoid both overstocking and stockouts, and improve their customer service levels. This approach also enables companies to optimize their procurement process by negotiating better prices for high-value items, reducing lead times, and improving supplier relationships.

C is for Challenges

ABC analysis is not a one-time process and needs to be updated regularly to reflect changes in demand, product life cycles, and market conditions. Moreover, it is essential to note that the categorization of items into A, B, and C is relative and depends on the specific company's objectives and strategies. This method can be time-consuming, especially for companies with extensive inventories. That is why it can be beneficial to invest in Inventory Optimisation software that can allow you to calculate and change your ABC with a click of a button. 

In the AGR system, the ABC analysis and subsequent service level targets are now in the hands of the user. You can set, adjust, and iterate service levels for groups of items in accordance with their importance and impact on holding cost. Furthermore, we have translated the ABC classification into importance levels ranging from high to low and visualized these in the item card, giving operational buyers better insight into each SKU’s importance and the parameters behind the ranking.

Want to learn more about ABC Analysis? Check out our other blog posts: Clarity is the New Clever or watch the recording from our live webinar: Honing in on Your ABC Analysis, where Elva Sif Ingólfsdóttir, Supply Chain Consultant at AGR Dynamics, demos the new ABC features in the system. If you want to read about the other useful features of the AGR system, please click here