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ABC Inventory

What is ABC inventory?

In the world of inventory management, ABC analysis is one of the most popular inventory categorization techniques. ABC (which stands for ‘Always Better Control’) helps retailers classify inventory based on each items’ annual consumption value and impact on inventory costs. ABC inventory analysis divides goods into one of three categories: (1) A-inventory: the most valuable products, with the largest contribution to profits; (2) B-inventory: ‘interclass’ goods, falling between the most valuable and least valuable products; (3) C-inventory: account for the small transactions that are vital to collective profits, but don’t matter much on an individual level. 

When you use ABC analysis, your company gains better control over their high-value inventory items, experiences improvements in availability, and sees a reduction in costs or losses.

4 benefits of using ABC inventory management

ABC inventory allows ecommerce companies to give their most important SKUs additional time and attention, thus boosting profits and helping control costs. What’s more, ABC analysis helps establish strategic pricing, improve demand forecasting, and optimize your inventory turnover.

Strategic pricing

The ABC method can help you establish strategic pricing for the products that bring in the most revenue for your brand. Once you’ve had a chance to monitor your inventory levels via ABC analysis, you can strategically increase the price of these goods; a surge in sales for a specific item implies a price increase may be reasonable (which supports greater profitability, too).

Improve forecasting

More often than not, deadstock is the result of inaccurate demand forecasting, which is why it’s important to have a trusted inventory control system in place. With the ABC technique, retailers can monitor and collect data about SKUs with high customer demand, which then improves forecasting and reordering accuracy (so you don’t wind up in a stockout or overstock situation).

Optimize turnover

Inventory turnover optimization is the key to a well-oiled warehouse and efficient supply chain management. ABC analysis helps companies maintain their stock turnover rate at an appropriate level, thanks to methodical inventory control and data capture. This sensible inventory turnover then reduces the carrying costs associated with holding excess inventory.

Boost cashflow

Because ABC analysis identifies the number of items in demand, companies can use this strategy to adequately stock goods with the highest inventory value (and keep less stock for B or C level SKUs). And since category A items are closely tied to a brand’s profit margins, prioritizing these items will be a big boost to cashflow and a company's continued success.

Frequently Asked Questions

  • How does ABC inventory control work?

    ABC inventory control works by determining the value of inventory items based on their importance to a business. In this process, ABC ranks individual goods using demand statistics and cost/risk data, and then inventory managers group these items into categories based on this criteria. This categorization helps business owners understand which of the total inventory items are most critical to the financial sustainability of their company.

  • What is an ABC analysis example?

    A real world example of ABC inventory classification can be found when looking at electronics manufacturers. These companies may categorize their high-value items (like cameras or mobile phones) as class A-inventory, since they’re very important for revenue but make up a smaller portion of their stock levels. Category B items might be things like screens or lenses, which are not quite as valuable, but still have certain valuation (and should be managed accordingly). Lastly, accessories like phone cases or screen protectors would fall into the C items ranking, since they’re low-value items but they account for the vast majority of total stock.

  • How is ABC inventory analysis calculated?

    ABC inventory analysis is calculated by multiplying the annual sales of a certain item by its cost. The results of this equation will tell you which goods are high priority, versus which yield a low profit (so you know where to invest). The formula for ABC inventory analysis is: annual usage value per product = [annual number of units sold (per item) x cost per unit]. Once you know the values for your ABC classifications, you can assign a group name to each item; goods with the highest inventory value will likely take up more of your resource allocation.

More terms and formulas

inventory Perpetual Inventory System See definition and examples
Other Made To Stock See definition and examples
formulas Holding Costs Formula See definition and examples

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