You optimize your inventory when you reduce your carrying value to the lowest amount necessary to meet your order fill rate objectives. Classification is the segregation of inventory into categories. One of the most common methods for classification is the ABC method where A are your most valuable items and C are your least valuable items. The idea is to focus on your high value items which have the most impact on carrying value.
When looking at optimizing your inventory ABC also looks at volume as price is too simplistic. So materials managers should view ABC categories based upon the annual consumption which is defined as:
(Annual demand) x (item cost per unit)
Demand is the combination of individual sales plus usage in kits, assemblies or bills of materials. With volume ABC analysis becomes more useful for focusing your optimization efforts. Although percentages are not fixed in stone, best practices suggest you should rate items from A to C, based on the following rules:
- A-items are goods which annual consumption value is the highest. The top 70-80% of the annual consumption value of the company typically accounts for only 10-20% of total inventory items.
- C-items are, with the lowest consumption value. The lower 5% of the annual consumption value typically accounts for 50% of total inventory items.
- B-items have a medium consumption value. Those 15-25% of annual consumption value typically accounts for 30% of total inventory items.
This method allows you to apply the 80-20 rule and focus the majority of your optimization efforts on the A items which are a small percentage of your inventory which account for the majority of you value. These items should have the highest inventory control
The SAP Intelligent Forecast tool is an advanced MRP which can forecast demand based upon statistical analysis of historical data. This powerful tool is awesome for Category A product analysis in a very detailed and accurate level.
For more holistic analysis SAP Business One is integrated with advanced inventory planners like Valogix and Netstock. These tools analyze your entire inventory and use similar concepts across
your entire inventory. For example, Netstock uses a combination of ABC and velocity with regression analysis to further pinpoint opportunities for optimization. Now you get a view where your fast moving cheap items (C high) are no longer lost within the C items. Likewise, your slow moving expensive items (A low) are also highly visible. As are your “bread and butter” lines (A high) that are massively important to your business.
To find out more about how you can optimize your inventory with SAPDistribution.com and the powerful tools in SAP Business One, contact one of our distribution experts at 678-401-6244 or fill out a Contact Us form.