Inventory Management: ABC Classification

ABC Classification System

• A method for inventory management that stratifies items based on their value.
• Classifies items into categories (A, B, C) using sales volume and GMROI, following Pareto's 80-20 principle.

Pareto Principle

• States that 80% of the effects result from 20% of the causes, often applicable in inventory management.

Differences Between Item Types

• Type A: Most valuable items requiring close management and expert oversight.
• Type B: Valuable but numerous items, suitable for computerized decision-making.
• Type C: Low-value items that can be managed with simple rules or eliminated.

ABC Class Cut-offs

• Cut-off points for ABC classification depend on the company-specific context.

Procedure for ABC Classification

• Calculate value for each SKU.
• Sort SKUs in decreasing value order.
• Calculate percentage contributions of value and total SKUs.
• Determine cut-off points for each classification.
• Validate that cut-off points correctly classify bordering items, repeating if necessary.

Calculation Methodology

• Reference class notes for specific calculations related to ABC classification.

Value Criteria: Dollar Value

• Evaluates SKU based on its volume of sales or associated costs.

Value Criteria: Logistics Criteria

• Assessed by the number of bin hits for a SKU, indicating its frequency of use.

Bin Hit Definition

• Refers to how many times a SKU is requested in a day, regardless of the quantity, reflecting inventory movement.

Value Criteria: Financial Criteria

• GMROI measures the financial return of inventory for a SKU, highlighting its contribution to returns on inventory assets.

Relative vs. Absolute Classifications

• Relative: ABC classification based on the subset of SKUs being analyzed (e.g., annual sales).
• Absolute: Based on the actual metric value, requiring specific cut-off points.

Inventory Stratification

• Process of classifying items based on company goals and business context.

Strategy to Adjust Categories

• "A" inventory increases with higher sales.
• "B" inventory remains stable.
• "C" inventory decreases significantly.

Impact of Effective Inventory Stratification

• Can reduce total inventory by up to 50%, leading to increased profitability and ROI.
• Enhances human resource management by prioritizing critical items.

Case Study and Lab Work

• Be prepared to engage in practical applications of ABC classification concepts.

Test your knowledge on the ABC classification system used in inventory management. This quiz covers key concepts including the Pareto Principle and how to effectively categorize items based on their value. Perfect for students or professionals looking to enhance their inventory management skills.