Importance of abc analysis in inventory management
Answers
Explanation:
An organization can benefit by adapting the ABC analysis in inventory management. Here are some of them:
End of life management:
Every product goes through four phases during its lifespan: launch, growth, maturity and decline. Once the product reaches the maturity stage it is bound to decline sooner or later. Customer demand plays a vital role in end of life management. With the concept of ABC analysis, inventory planners can forecast the demand for products beforehand and manage the stock levels accordingly. The maturity and decline period is different for different products, with decrease in demand the sales will fall and therefore it would be wise to reduce the inventory levels to minimize the carrying costs on the items and also avoid having obsolete stock.
Supplier negotiation:
It is obvious that the company would make most money by negotiating with suppliers of the class A category since 70% - 80% of the money is spent on them. An offer may look lucrative from afar but never accept the very first one. Make a counter offer in return. Wait for the supplier to revise his numbers. If the supplier is not willing to budge, you can still make the most of the deal by negotiating other features like providing post purchase services, reducing the down payment, free shipping etc. The negotiation needs to be a win-win approach, the supplier needs to make reasonable profit from the deal while helping your company get desired quality product and services.
Inventory optimization:
Optimizing inventory is a popular benefit of ABC analysis as it allows inventory planners to organize high priority items aligning to customer requirement. Depending on the demand fluctuations the inventory is stocked to cater to high demand items and also carrying low stock for undesirable items.
Strategic Pricing:
ABC analysis of inventory helps in setting the prices very strategically for products which bring more value to the company. The company will have to monitor those products which are highly desirable to customers and have an escalating demand. Based on that data, the company can increase the price of these items by a few extra dollars which will make a huge impact on the profit. Another strategic pricing option to consider is to consolidate suppliers or consider transferring business to a single supplier. Purchasing more goods from a single supplier will reduce carrying costs and complexity costs associated with them.
Resource Allocation:
Resource allocation with ABC analysis is a continuous process requiring periodic tracking of class A items. Since these items are of utmost value, the stock level must always align with the customer demand. In case a class A item is no longer desired by the customers or has fairly lower demand, the item needs to be moved to a lower classification B or C.
Customer Service Levels:
Not all products can be treated the same or achieve same customer service levels. The service levels for different products depends on multiple factors like the item cost, quantity sold and margin on the product. There is no point crowding your warehouse with low margin products which are sold once in a while. ABC analysis allows planners to set service levels based on the product classification, which improves the overall supply chain performance carrying less safety stock.