In the world of inventory management, ABC analysis is one of the most popular inventory categorization techniques. ABC (which stands for ‘Always Better Control’) helps retailers classify inventory based on each items’ annual consumption value and impact on inventory costs. ABC inventory analysis divides goods into one of three categories: (1) A-inventory: the most valuable products, with the largest contribution to profits; (2) B-inventory: ‘interclass’ goods, falling between the most valuable and least valuable products; (3) C-inventory: account for the small transactions that are vital to collective profits, but don’t matter much on an individual level.
When you use ABC analysis, your company gains better control over their high-value inventory items, experiences improvements in availability, and sees a reduction in costs or losses.
ABC inventory allows ecommerce companies to give their most important SKUs additional time and attention, thus boosting profits and helping control costs. What’s more, ABC analysis helps establish strategic pricing, improve demand forecasting, and optimize your inventory turnover.
The ABC method can help you establish strategic pricing for the products that bring in the most revenue for your brand. Once you’ve had a chance to monitor your inventory levels via ABC analysis, you can strategically increase the price of these goods; a surge in sales for a specific item implies a price increase may be reasonable (which supports greater profitability, too).
More often than not, deadstock is the result of inaccurate demand forecasting, which is why it’s important to have a trusted inventory control system in place. With the ABC technique, retailers can monitor and collect data about SKUs with high customer demand, which then improves forecasting and reordering accuracy (so you don’t wind up in a stockout or overstock situation).
Inventory turnover optimization is the key to a well-oiled warehouse and efficient supply chain management. ABC analysis helps companies maintain their stock turnover rate at an appropriate level, thanks to methodical inventory control and data capture. This sensible inventory turnover then reduces the carrying costs associated with holding excess inventory.
Because ABC analysis identifies the number of items in demand, companies can use this strategy to adequately stock goods with the highest inventory value (and keep less stock for B or C level SKUs). And since category A items are closely tied to a brand’s profit margins, prioritizing these items will be a big boost to cashflow and a company's continued success.