With the calculations complete, you can use your final data to review how you currently manage the inventory in each category. ABC inventory classification empowers lean manufacturers to improve the efficiency of the inventory replenishment schedule. And improvement will lead to reduced inventory, delivery and management costs. Software such as EazyStock will allow you to categorize your inventory based on multi-dimensional criteria including demand, sales frequency, number of picks and annual consumption value. © 2020 Syncron AB and/or its affiliates. Use an inventory optimization tool to automate the process. All rights reserved. In this post, we’re going to discuss how you can classify your inventory into three ABC categories and introduce the concept of XYZ analysis. This means you’re probably over- and under-ordering on many product lines. To help overcome these issues, you can apply XYZ analysis. If demand is steady and easy to predict (X items), your safety stock levels can be much lower than products where demand is much more volatile (Z items). Inventory Inventory Inventory is a current asset account found on the balance sheet, consisting of all raw materials, work-in-progress, and finished goods that a company has accumulated. Provided by Syncron Inc. Every organization constantly strives to maintain optimum inventory to be able to meet its requirements and avoid over or under inventory that can impact the financial figures. 4. Merchandising Companies: Inventories are assets items for sale in the ordinary course of business or goods that will be used or consumed in the production of goods to be sold. Learn more about our customers and the challenges EazyStock helped them solve, Benefit from our expertise and grow your business with EazyStock’s partner programs, All our global reseller and ERP partners at a glance, Learn more about inventory management with our free whitepapers, guides & e-books. 5. By automating your inventory classification process, you can be sure that it stays up-to-date with re-classifications taking place daily so products are always managed according to the most relevant inventory policy. If you’re wondering what is the best way to manage inventory with hundreds or even thousands of SKUs, you’ve found your answer: ABC analysis (otherwise known as ABC classification). Inventory classification can help a company control its inventory by reducing the amount of stock they have on hand and by increasing the inventory turnover ratio. ABC classification is based on the premise that not all inventory is of equal value. Chicago, IL 60601. The good news is that there is plenty of room for improvement! Peter Drakeley . List the products in descending order based on their annual consumption value. ABC classification groups inventory items based on each item’s total annual cost. Typically, 'A' items represent 20 percent in terms of quantity and 75 to 80 percent in terms of the value. Classification of inventory is done on this basis and thus the different classifications of inventory are as follows: Instead if follows the Pareto Principle, where 20% of stock accounts for 80% of the value to the business. Calculate the cumulative percentage of items sold and cumulative percentage of the annual consumption values using the totals. Adding another level of insights to your inventory classification model allows you to make more informed ordering and stocking decisions. Global mandates such as recycling and energy regulations need to be managed. Total up the number of units sold and the annual consumption value. This means that you can segment items based on their forecastability – the likelihood that their demand will vary from their forecast. This could include setting up sophisticated ordering processes for all A items, such as checking every purchase order and spending more time discussing lead times with suppliers to guarantee best value and timely deliveries. Inventory is classified as a current asset on a … Your inventory’s ‘value’ can be based on a number of criteria, such as annual sales revenue, profitability or annual consumption value. 3. 5 Inventory Reduction Strategies to Drive Cost Savings, 4 Ways Technology Can Simplify Inventory Management, Coronavirus Series Part 3 – Improving Inventory Planning During the COVID-19 Pandemic, Medical Supply Industry Challenges & Solutions, How to Find the Right Economic Order Quantity. Give deeper into key inventory optimization topics with our on-demand webinars. Classification of Inventory: Learning objectives of this article: Identify major classifications of inventory. Using ABC classification you can therefore split inventory into three categories: Category A: this is the smallest category and consists of the most important stock items, Category B: will generally be slightly larger in terms of volumes of SKUs and will usually be made up of products of less value, Category C: this will typically be the largest category where products will contribute the least to your business’s bottom line.

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