How to use ABC analysis for warehouse management

The ABC analysis for the warehouse is used for inventory management and maximization of inventory productivity. A mathematical method that allows you to analyze the data and identify the strengths and weaknesses of your storage.

A well-stocked warehouse is the key to keeping a large number of customers happy. But warehouse management involves high costs and knowing how to manage unsold items, transforming stocks into productive resources, is indispensable for any commercial activity.

Inventory performance can be measured with different methods and tools: one of them is ABC analysis which, when applied properly, can increase inventory profitability and optimize investments.

What is ABC analysis?

The ACB analysis is a scientific method applied to the warehouse for the analysis of data on stocks and their productivity in a given period of time. Basically it serves to identify the most profitable products for the commercial activity and those that, on the other hand, only produce costs.

This analysis is based on the Pareto Principle , or 80/20 rule, which states that 20% of the causes are sufficient to cause 80% of the effects. To use this method, you have to classify your inventory into 3 categories based on your overall turnover.

The three categories of the ABC inventory analysis

Group A : “ money maker ” section of the warehouse, that is the part of items, usually in a reduced percentage, that produces the largest part of the revenue. Since stocks are of greater value, they must be safeguarded and valued.

Group B : warehouse items with an intermediate value, which generate around 15% of turnover and which can fluctuate, depending on market demands, between category A and category C.

Group C : are the unproductive stocks, the stocks that represent just 5% of the turnover.

What is ABC analysis for?

Being able to optimize investments in the warehouse means finding a profitable balance between available items and procurement costs . The ABC analysis is used to study stocks from the point of view of their performance. The advantages are obvious:

Customer Satisfaction : If stocks of the most popular products run out, you lose sales and customers. The latter will in fact look for the item from competitors and could become regular buyers.

Save money : unproductive stocks have high costs, because they must be managed and take up space in the warehouse. If they are perishable materials, the risk is to lose the capital invested.

Does ABC analysis work?

ABC analysis is one of the possible metrics to be applied for inventory analysis. There are also others, based on the frequency of sale or on the movement of a variant, the results of which can be cross-referenced to offer a comprehensive overview. Furthermore, the ABC analysis has some shortcomings that make it necessary to resort to other integrative tools, also based on artificial intelligence . Here are the most obvious ones:

It does not consider seasonality : some products are subject to peak demand such, during certain periods, as to justify a transition from group B to group A.

It does not apply to products in the launch phase : no performance history is available for new items, for which it is advisable to wait a few months before assigning them an inventory category.

Optimize sales and profits with group A

Finally, let us dwell on group A of the ABC analysis, which is the one that produces 80% of revenue. How is its management optimized? Here are some tips for doing this:

Strengthen the supply chain

The supply chain is vital. In order to always have the supply under control, it is advisable to create a solid and trusting relationship with the main supplier . Which should not preclude the possibility of buying from others, on the contrary! Having a back-up supplier means you don't run the risk of out of stock.

Monitor stocks

The monitoring of group A allows the commercial activity to satisfy customer demand thanks to the availability of the most requested and therefore more performing products. But how are stocks kept under control? One of the most functional approaches is to identify the reorder point, which is the one that indicates the lowest amount of inventory before the necessary replenishment.

A useful data both to keep the stock at the optimal level and to automate the purchasing process.

Investing in group A

The items in stock in group A are the best performing ones, therefore it is obvious to concentrate a large part of the investments on them, for example by ordering a larger quantity to be ready for peak demand. This step can trigger a further virtuous mechanism: if the demand increases, it is possible to gradually increase the prices of the items and have a greater profit margin.

Visit here for - Pharmaceutical Manufacturer