Inventory control can be especially difficult when accounting for seasonal variations in ordering, product sourcing, shipping costs, and other variables that are not always in the company’s control. ABC analysis is a method of managing inventory that utilizes a simple priority system.
The 80/20 Principle
ABC analysis is based on the popular business principle that 80 percent of a company’s outcomes are derived from 20 percent of its inputs. This method provides businesses with a system of identifying the top 20 percent of products that generate the most income. Those labeled with an A are extremely important while B and C ratings signify moderate importance and relative unimportance.
Also called Pareto’s Principle, ABC analysis is used primarily to identify the most profitable and in-demand products. However, it is also an effective way to measure the most important customers, valuable employees, riskiest business segments, and most inefficient parts of any given process.
Other Ways to Improve Inventory Management
When companies don’t manage inventory well, it ties up cash and results in lost profitability. The benefits of ABC analysis and other methods of inventory management cannot be overstated. Some of these include:
- Avoiding perishable goods like food and cosmetics from spoiling
- Decreasing costs associated with storing inventory
- Avoiding being left with stock that is unsellable due to it being out of style, out of season, or other common reasons
- Keeping inventory moving is the best way to maintain a consistent cash flow
Supply chain managers who are struggling with inventory control may want to consider implementing one or more of these strategies:
- First In, First Out: Employing this practice means that a company sells its oldest inventory first and stores the newest. This is especially important for organizations that sell perishable stock, but is also appropriate for non-perishable items. Products that sit on a shelf too long are likely to wear out and not seem as new to the consumer. It is also worth considering that packaging and features often change, which means that failing to rotate stock could result in obsolete products.
- Creating a Contingency Plan: Not planning for problems such as inadequate inventory for seasonal sales spikes and manufacturers discontinuing products without warning could have disastrous consequences. Having a back-up plan helps to mitigate the risks.
- A Different Approach to Taking Physical Inventory: Most businesses manually count inventory at year end to coincide with accounting cycles and tax filing. The downside to this approach is that it can be difficult to determine the cause of a discrepancy when counting merchandise for an entire year. Periodic spot checks of specific products can make keeping up with inventory easier over the course of the year.
- Enlist the Aid of Suppliers: Some suppliers may give inaccurate delivery dates to give themselves a built-in margin of error. This can be detrimental to inventory management because it affects how often a company places orders. Supply chain managers should press suppliers for the most accurate shipping time so they can be more efficient and proactive about the ordering process. One way to obtain faster service from suppliers, especially those that are overseas, is to provide accurate projections of future orders.
Whether used separately or together, these strategies level the playing field for small organizations competing with larger ones in tight markets.
Article Submitted By Community Writer