ABC Analysis Benefits
A long list of benefits can result from applying ABC analysis to inventory management, including:
- Increased Inventory Optimization: The analysis identifies the products that are in demand. A company can then use its precious warehouse space to adequately stock those goods and maintain lower stock levels for Class B or C items.
- Improved Inventory Forecasting: Monitoring and collecting data about products that have high customer demand can increase the accuracy of sales forecasting. Managers can use this information to set inventory levels and prices to increase overall revenue for the company.
- Better Pricing: A surge in sales for a specific item implies demand is increasing and a price increase may be reasonable, which improves profitability.
- Informed Supplier Negotiations: Since companies earn 70% to 80% of their revenue on Class A items, it makes sense to negotiate better terms with suppliers for those items. If the supplier will not agree to lower costs, try negotiating post-purchase services, down payment reductions, free shipping or other cost savings.
- Strategic Resource Allocation: ABC analysis is a way to continuously evaluate resource allocation to ensure that Class A items align with customer demand. When demand lowers, reclassify the item to make better use of personnel, time and space for the new Class A products.
- Better Customer Service: Service levels depend on many factors, like quantity sold, item cost and profit margins. Once you determine the most profitable items, offer higher service levels for those items.
- Better Product Life Cycle Management: Insights into where a product is in its life cycle (launch, growth, maturity or decline) are critical for forecasting demand and stocking inventory levels appropriately.
- Control Over High-Cost Items: Class A inventory is closely tied to a company’s success. Prioritize monitoring demand and maintaining healthy stock levels, so there’s always enough of the key products on hand.
- Sensible Stock Turnover Rate: Maintain the stock turnover rate at appropriate levels through methodical inventory control and data capture.
- Reduced Storage Expenses: By carrying the correct proportion of stock based on A, B or C classes, you can reduce the inventory carrying costs that come with holding excess inventory.
- Simplified Supply Chain Management: Use an ABC analysis of inventory data to determine if it’s time to consolidate suppliers or shift to a single source to reduce carrying costs and simplify operations.