ABC analysis is a representative method for prioritized inventory management.
The concept behind ABC analysis is very simple, and it can be utilized when managing inventory and understanding products. It is also an important analytical method in corporate management.
In this final chapter of our general theory series on inventory management and order management, we will explain what ABC analysis is.
We will introduce the advantage and disadvantage of ABC analysis, the three steps for conducting ABC analysis, points to note, and even propose an effective inventory management system for ABC analysis. If you are considering implementing an inventory management system, please use this article as a reference.
・What is ABC Analysis?
・Three Steps of ABC Analysis
・Points to Note in ABC Analysis
・Utilizing ABC Analysis Results
・Summary | Optimize Operational Efficiency with an Inventory Management System
ABC analysis is an analytical method that classifies items by rank based on indicators such as inventory and cost, and manages them by establishing priorities. First, we will explain the thinking behind ABC analysis, then discuss the advantage and disadvantage of adopting ABC analysis.
The basic concept of ABC analysis is based on not applying uniform management to all inventory items. ABC analysis is premised on the idea that 20% of inventory accounts for 80% of total inventory value. Specific business use cases include scenarios where the top 20% of products account for 80% of sales, or where the top 20% of customers account for 80% of sales.
ABC analysis has the benefit of being able to visualize the importance of products, services, etc. By accurately understanding product information, it can be utilized in corporate management and marketing strategies.
Depending on the method used to conduct ABC analysis, it can become complicated and may lead to human errors. Additionally, in companies where personnel are limited due to staff shortages, chronic human errors become a significant disadvantage.
To avoid such troubles, it is necessary to take measures at an early stage, such as implementing an optimal inventory management system.
ABC analysis is an indispensable analytical method for business owners and those involved in marketing strategies. When actually conducting ABC analysis, the following three steps are necessary. Here we will cover STEP 1 through STEP 3 in order.
Start by collecting the data needed for ABC analysis. Once data is collected, analysis using Excel becomes possible. For example, collecting data with an inventory management system such as the Smart Reel Rack (described later) is optimal. The vast majority of inventory management systems are equipped with data extraction functions, making them very convenient when gathering required inventory information.
ABC analysis is a method of classifying products starting with those that have the largest sales ratio relative to the total. Therefore, first calculate the sales ratio for each product. By dividing each product's sales by total sales over a defined period, you can calculate the sales ratio.
（Source：https://xtech.nikkei.com/atcl/nxt/column/18/01618/00007/）
After calculating the sales ratio for each product, rearrange them from largest to smallest ratio. (This is called a Pareto chart.) Once rearranged, calculate the cumulative ratio. Based on these cumulative ratio values, classify items into three groups: "A," "B," and "C." ABC analysis requires these three steps.
Because it can analyze important information, ABC analysis is widely used in management and marketing. However, simply performing the analysis is not enough. ABC analysis has points that must be noted, as follows:
Attention must be paid to transient products that sell only during certain periods. This is because there are many products whose sales increase only during specific periods, not limited to standard product lineups.
A representative example would be products whose sales surge rapidly due to trends or fads. If ABC analysis is conducted while ignoring these transient products, accurate analysis becomes difficult. Therefore, when conducting ABC analysis, it is desirable to separate the overall analysis results from the transient product analysis results and perform calculations twice in total.
It is also good to remember the possibility that transient products may become part of the standard lineup as their demand stabilizes.
ABC analysis results are classified by rank as follows, and ordering methods suited to each rank are adopted. The fact that different ordering methods are used for each is also a characteristic of utilizing ABC analysis results. Let's check them one by one.
One way to apply ABC analysis results is to designate products that account for 20% of sales as A items and manage them with top priority, aiming to keep inventory levels as low as possible while avoiding stockouts. For this reason, the periodic ordering method—which allows you to adjust order quantities flexibly—is considered the most suitable approach.
B．Lower Management Level from A and Utilize Fixed-Quantity Ordering Method
Since the impact on sales is lower than Category A items, the management level is lowered. Therefore, it is appropriate to adopt the fixed-quantity ordering method. As a point to note for Category B items, when products are high-priced, the periodic ordering method should be adopted.
Similar to Category B items, since the impact on sales is lower than Category A items, the fixed-quantity ordering method suited for management efficiency is appropriate. Additionally, the double-bin method is also suitable for Category C items, and by utilizing the double-bin method, ordering timing and quantities can be understood.
For ABC analysis, when seeking labor reduction and improvement of overall production efficiency in assembly processes, implementing an inventory management system can be said to be most effective. Utilizing the Smart Reel Rack contributes to improved total production efficiency and labor reduction, helping to reduce costs efficiently while preventing human errors. Additionally, since receiving and issuing are possible regardless of reel type, not only inventory space but also warehouse area can be reduced.
Please view the Smart Reel Rack feature page here !