We return here to a topic that we know interests many, but which many may also be a little questioning about. What is ABC classification, or ABC analysis, and how do you use it to get more efficient inventory management and better order management? What are the benefits? If a company now uses classification, is it possible to sharpen it further in the hunt for, for example, reduced inventory values?
The ABC classification is used to distinguish and group different articles so that a layer is organized and categorized in a way that simplifies article management. The classification increases the understanding of the effect different item categories have on the total inventory cost and purchasing work, and thus you get an instrument in the work of achieving better inventory management and a more efficient purchasing process. It will simply be easier to handle different item categories based on how they differ in value and order frequency, for example. In this way, the foundation is laid for more efficient order handling and more accurate purchasing and stock planning.
An ABC analysis can be very important as a tool for improvement. Inventory values can be reduced, the balance between inventory levels and delivery service levels improved, costs reduced as well as restricted capital. The financial potential is illustrated in a good way by a statement from one of our customers: "We reduced the inventory value from SEK 26 million to SEK 16 million in 4 months"! The classification is thus a sharp improvement tool and we will look at how it can be even sharper.
It is an "importance ranking"
The ABC classification is based on how important you consider an article to be for a business and the most common is that you start from sales volumes. A common model is a division where A accounts for 80% of the sales volume, B for 15% and C for 5%. It is also possible to divide the articles into more categories, but you should always keep in mind that they should be easy to differentiate. The ABC classification should simplify, not create unnecessary extra work.
An ABC classification should give a clear picture of how business-critical an article is for a company. This means that the classification shows where resources are to be invested and time spent on strategic considerations. It is not wrong to see the ABC classification as an importance ranking. If we start from the bottom with the C-category, many times items are expensive, demand is quite low and they should therefore not have a priority place in the warehouse. One reason is that inventory costs are far too high in relation to sales volume.
B-category items are characterized by the fact that they are not in great demand, but neither are they low. The articles are important but they do not reach the great significance of those in the A-category. These articles are of great importance to a business. Demand is high, items are often relatively inexpensive and they do not stay in stock for long. The fact that the articles are so important means that they require value analyzes because they are of great importance for set goals regarding service and customer satisfaction. This is where the majority of the work efforts must be managed and this is where the company management has its biggest strategic challenges. The ABC rating makes it easier to meet these challenges!
Did the business systems make the ABC classification forgotten?
"Using ERP systems is not a good reason to stop using ABC classification and there is certainly reason for many companies to reintroduce a more ABC-oriented governance." The lines are included in an article written almost 20 years ago! (Better Productivity, No. 2, 2003). The article describes how ABC classification and strategies for different article groups were a frequently used approach when there were more elements of manual planning efforts. In step with the introduction of business systems, the classification was applied to a lesser extent. The underlying reason seems to be a notion that with computer support you no longer have to worry about prioritizing work efforts to the same extent on what is important. They relaxed, so to speak, and forgot that the calculations in the business systems must also be translated into practical action, which requires manual efforts. Of course, there is system support to automate much of the work with the ABC classification, but then we are not referring to business systems. We will return to this shortly.
How to sharpen the classification?
There are certainly many companies that have realized the benefits of ABC classification, but which at the same time could have an even better effect. The classification is usually based on the sales volume, but it is possible to add additional variables or parameters. Some examples are sales frequency, item value and gross margin. It can also be very important to do just that, because a casual classification based on sales volume does not always have to be optimal for a company. The starting point should instead be to, as far as possible, choose variables that have a secured cause / effect relationship with what you want to make more efficient.
For example, if you want to increase the company's profitability through selectively targeted sales efforts, it is not always the case that the criterion for ABC classification of the product range should be annual sales. It is much more likely that an ABC classification based on gross margin can lead to the intended result because there is a more assured cause / effect relationship between gross margin and profitability than between sales volume and profitability. The bottom line is that it is very important to discuss the purpose of the classification!
Gets extra sharp through digitization and automation
The concept of inventory management includes various parts. Three more important parts are "demand planning" (calculation of expected demand), "Supply planning" (how customers' needs are to be met) and "Order Management" (control of orders, deliveries and deviations). An ABC classification often lays the foundation for efficient work in these parts, and the effect is then extra large with an automated inventory management system such as SOLO.
Digitizing inventory control with SOLO means that you have full control over your product flows with an integrated ABC classification that handles several different parameters. It will be easier to manage the warehouse operations according to set service goals and to create a priority over the products where you should focus = the most profitable and in demand!
Then there was this with the business systems. If a company has an business system with a warehouse management function, why should it also invest in integrating SOLO? An business system can provide a significant reduction in inventory values, but with a system that is developed to automate the purchasing process, the reduction can be significantly greater! You avoid manual entries and get an automatic update of all important values. This is especially important in expansive companies with growing product ranges. When manual work is required, it is easy to lose track and control when the products become numerous and the effect can be expensive overlays and a negative impact on the balance sheet.