Overview
ABC analysis is a technique used in inventory management and supply chain management to classify items based on their relative importance. It helps prioritize items and allocate resources effectively by categorizing them into three groups: A - most important, B - important, and C - least important, hence the name "ABC analysis."
To explain further, here's a breakdown of the ABC analysis categories:
Category A
Items in this category are considered the most critical and valuable to the organization. They typically have a high value to the business whether e.g. in sales value or units, profit margin and other criteria. These items are typically a small percentage of the total inventory items but contribute a significant portion of the overall units or value. A common guideline is that category A items might represent around 20% of the items but contribute to 80% of the value or units.
Category B
Items in this category have moderate importance. They are less critical than category A items but still hold some significance. These items typically represent a moderate percentage of the inventory items and contribute to a moderate percentage of the value or units. A common guideline is that category B items might represent around 30% of the items but contribute to 15% of the value or units.
Category C
Items in this category have the lowest importance. They are often low-value or low-demand items that represent a large portion of the inventory items but contribute a relatively small percentage of the value or units. Category C items are typically abundant in quantity but have a lower contribution compared to categories A and B and might represent around 50% of the items but contribute to 5% of the value or units
Summary
The ABC analysis structure is based on the following general principles:
• A = 80% of annual sales 20% of item numbers
• B = 15% of annual sales 30% of item numbers
• C= 5% of annual sales 50% of item numbers
ABC Analysis in AGR
The ABC functionality in AGR is flexible and allows the calculation of ABC values in a number of ways. You can decide to calculate the ABC values for each value within the Item Group hierarchy or for all items in AGR.
Additionally, in order to prevent distortion of the analysis by including items with little sales history or those which haven't sold for over a year, AGR excludes these items from the ABC and applies a separate value to those items.
To ensure the ABC calculation is appropriate to the types of items in your business, AGR calculates ABC for 6 metrics and allows you to choose which should be the one you use in your business.
ABC Settings in AGR
To configure ABC settings in AGR, go to the Settings icon on the Navigation bar, select Settings and click on the ABC tab.
ABC groupings
AGR can calculate ABC values for items, grouped in different ways.
If no selection is made, the calculation will be made across all Open items.
To have a separate ABC analysis within each value of Item Group Level 1, toggle the ABC Grouping for Item Group Level 1 to be enabled
ABC Metrics
AGR calculates ABC values based on 6 different metrics as listed below, where the detail of the calculation is shown:
NOTE:
For items that do not have 12 months of history, a scaling factor will be applied to pro-rate the available history to give a 12-month view so that all items included in the ABC calculation are compared on 12 months of data
You can choose to have a one-level ABC or a two-level ABC by selecting one or two metrics from the 6 metrics.
By default, the ABC metrics set in AGR are:
Cost of goods sold
Number of sales lines
However, you can decide which one or two are most applicable to the types of items you have in your business and adjust the selection accordingly.
ABC Analysis and Confidence Factors
In the ABC settings tab, you can decide which Confidence Factor is assigned to each of the ABC values. The Confidence Factor plays a key role in the calculation of safety stock, used in ordering.
In the Confidence Factor section of the ABC settings tab, you can see the default Confidence Factors AGR has set but you can override these here to suit your business requirements.
NOTE:
A Confidence Factor of 50 = item will have no safety stock calculated
A Confidence Factor between 50 - 99 = item will have safety stock calculated
Excluded Items from ABC Analysis
To ensure that appropriate safety stocks are calculated for New and Dead items, those items are categorized separately in the ABC analysis with a value of N (for New items) and X (for Dead items).
The default confidence factors for these items can be seen in the ABC settings tab. New and Dead items are described here:
NOTE:
Items with an ABC value of X that have BOM Consumption in the last 12 months are still considered Active Stock on the AGR Stock Health dashboard.
However, these items will continue to be shown with an ABC value of X as BOM Consumption is not an ABC metric.
Importance levels
As well as analyzing items according to their assigned ABC values, you can also use the Importance value assigned within AGR. These are seen in the Dashboard as well as columns and filters in Items, Reports and Plans and labels in the Item card.
The mapping of an ABC value to an Importance value of either High, Medium or Low is done in the ABC Settings in the Importance level grid. The mapping is not editable and can be seen here for a two-level ABC.
For a one-level ABC, the mapping is as follows:
Updating ABC Values
Any changes made in the ABC settings can be applied by clicking on the Run ABC button or if this is not selected, ABC values will be recalculated according to the settings changes during the next overnight job.
Viewing your ABC data in Items & Reports
In the Items and Reports modules, you can easily see the ABC values and Importance assigned to items by selecting the column ‘ABC’ in addition to the Importance and six specific ABC columns.
See the video
