Inventory Management Technique: ABC
What is the most effective way to manage various types of inventory? An inventory classification system. By segmenting your inventory, it makes it easier to track inventory items and more effectively manage your resources. Inventory classification, including ABC, VED, FSN or SOS, can be very beneficial for cutting costs, increasing efficiency and increasing profitability.
The ABC method uses three different inventory categories, including:
- Class A: High priority items that directly impact your business’s success. Customers request these products most often.
- Class B: Middle-of-the-road items.
- Class C: The least valuable, lowest priority items.
The ABC inventory management technique, based on the “80/20 rule,” uses the following premise:
- 80 percent of an inventory’s value is in approximately 20 percent of the items. Class B and Class C inventory items make up the remaining 80 percent of the items (Class B with 30 percent and Class C with 50 percent).
After you’ve divided your inventory into these categories, you will need to determine how to best allocate your resources. You will need to dedicate more time and resources to the Class A items, since they are most important to your business. It is necessary to ensure that the Class A items receive tighter and more frequent controls than lower priority items.
There are many benefits of using the ABC inventory classification method, including that it helps you conduct more organized cycle counts and it provides a clearer picture of customer demand, so you can ensure that stock levels meet demand. Additionally, the ABC method helps with forecasting and pricing strategies.
We will explore other inventory classification methods in future articles. TRXio is a cloud-based inventory management system that will help you effectively utilize the ABC method. For information on implementing the ABC inventory management technique, or any other inventory management method, please contact TRXio at 844-868-7225, or request a demo below.