What is ABC Analysis?
ABC Analysis is a method of inventory management that classifies the inventory into different groups depending on how important it is for the business. The importance can be assigned based on the revenue it brings, profitability, cost, etc. The most important inventory is Class A and the least important inventory is Class C. Businesses also allocate the monitoring and tracking resources based on the inventory class.
However, it’s important to note that the classes are not rigid and may require reallocation based on changing demand patterns. Sometimes the business may also go beyond Class C and allocate more classes as per requirement.
What are the benefits of ABC analysis?
The following are the benefits of ABC analysis:
- It allows businesses to focus on Class A inventory and ensure that it is always well-stocked.
- It helps in optimizing storage costs by ensuring that excess inventory is not held for Class B and Class C inventory groups.
- It helps in simplifying demand forecasting and streamlining supply chain management.
- Enables strategic pricing by providing insight into the most valuable products. A business can slightly increase the prices of high-demand products and increase profitability.
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Route optimization also results in lesser operational costs and improves the profitability of your business.