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.