ABC analysis is an inventory categorization method that determines the most and least valuable product in one’s inventory. Followed on the lines of the Pareto principle, it says that 20% of the most useful products in your inventory is accountable for 80% of the total revenue a company or store makes.
The inventory management system is not only complex but also quite expensive. A study reveals that nearly $1.35 is required behind inventory for every dollar of sales made.
Coming back to ABC analysis, let us dig deep and learn more about it.
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What is ABC Analysis?
As discussed earlier, ABC analysis is a method to determine the best and worst-performing products within your inventory. While it follows the Pareto principle or the 80/20 rule, here is a deeper classification of this method
- A Grade- This class is for the best performing product. This product is responsible for bringing the maximum revenue. Since it is the most valuable product, it should be safe and prioritized.
- B Grade- This product class fluctuates between best and worst and accounts for nearly 15% of the total revenue.
- C Grade- This class of products is the worst-performing inventory and accounts for almost 5% of the total revenue. These products are also referred to as dead stock.
Benefits of ABC Analysis
Free business consulting sessions tell you that there are many added benefits of running an ABC analysis regularly. Some of them are listed here.
Better Inventory Management
The best and worst-performing items are clearly highlighted when you run an ABC analysis on your inventory. Pick the A-grade products and put the maximum budget selling them for entire revenue generation. Deprioritize the C grade products since they bring minimum value with the help of an inventory management tool.
Better Customer Satisfaction
Free e-commerce training and ABC analysis help you determine the grade-A products; you can work on them more closely and ensure that they are always available at the disposal of your customers. Make sure that you never miss the opportunity to sell your best-selling product.
Improved Pricing Decisions
When you have your worst performing products listed, you can spend less on them and save some revenue. Thereby, you can use that revenue to increase the sale of the Grade A products for maximum return.
How to Run an ABC Analysis?
To run a proper ABC analysis, you need a simple formula to calculate the best and worst-performing products. Firstly, you need to calculate the revenue generated by a particular product. Next, divide the number by the total revenue generated after selling all the available products at your store. Repeat the process every time, and you will get a fair idea of the best and worst-performing items.
The top 80% of revenue-generating products are A-grade products. Falling in the middle of the rack are B grade products. Apart from that, the least performing or 5% revenue-generating products are the C grade products. ABC analysis is a required method every business should perform.