An inventory management system tracks quantity to reduce the chances of part stockouts and ensures the needed parts are always on hand. Tracking inventory is essential, but managers can improve their inventory and efficiency by completing ABC Analysis. This analysis technique requires managers to group items based on demand, cost, and risk. ABC Analysis helps fleets understand which products or services are more critical to the financial success of their organization.
The Pareto Principle
ABC Analysis, based on the Pareto Principle, helps organizations identify initiatives to prioritize. “The Pareto Principle, also known as the 80/20 rule, states 20 percent of your inventory takes up 80 percent of your volume. The Pareto Principle classifies inventory based on three categories: A, B, and C, to identify items you constantly order and receive an issue,” said AssetWorks Senior Industry Consultant Danny Brashear.
Most organizations have a small amount of A items, slightly more group B products, and a large amount of C goods:
- Class A
Percentage of Inventory: 10% to 20%
Importance: High Dollar Value
Annual Consumption: 70% to 80%
- Class B
Percentage of Inventory: 30%
Importance: Medium Dollar Value
Annual Consumption: 15% to 20%
- Class C
Percentage of Inventory: 50%
Importance: Low Dollar Value
Annual Consumption: 5%
Fleets can use these three categories to calculate ABC analysis through a formula:
(Annual number of items sold) x (Cost per item) = (Annual usage value per product).
Inventory managers can attempt to calculate with Excel spreadsheets, but utilizing an inventory management solution with ABC Analysis tools can offer more insight and accuracy. Unfortunately, not all inventory management vendors offer ABC Analysis.
Utilize a Solution
ABC analysis is a feature in AssetWorks MyInventory, but fleets often do not utilize the tool and are missing out on bettering their inventory control. Demand forecasting is difficult without historical data. Running ABC Analysis shows your top-performing items in an Economic Order Quantity (EOQ), which calculates the ideal order size. “Running the EOQ lets you know what you have overstocked. It is going to change from time to time. Let’s say I have 20 of an item on the shelf, but I only issued ten last year. Why would I have 20 on the shelf again? You should never have more than what’s going to sell out in a year- especially if you can get that part in 20 minutes,” said Brashear.
Once a fleet implements its inventory management software, it will collect the data to run an ABC Analysis annually. “An inventory manager’s role should be to run ABC Analysis once a year minimum because your parts, times, and priorities change. If a part went from being issued 15 times a year to never, you need to know,” stated Brashear. There are other reasons to complete the analysis annually:
- Changing Item Values
Various factors, such as market conditions, customer preferences, and competition, can cause the value of items to fluctuate. Conducting an ABC analysis captures these changes to ensure your resources get allocated to the items providing the most value.
- Updated Data
Completing ABC Analysis gathers fresh and updated data to make accurate categorization decisions and prevents relying on outdated information.
- Strategic Planning
Strategic planning is a never-ending process that rewires aligning objectives to current market conditions. Running ABC Analysis allows organizations to gather insight into categorization to apply to their strategic planning process.
Many organizations are unaware ABC Analysis is an option for them, or if they do, they are intimidated by the process. Let us help set your inventory for long-term success by teaching you the tools to optimize decision-making and performance.