Most companies that are active in distribution or production probably know - or at least have heard of - ABC classification. But what is it, and why should you ABC-classify your stock?
Simply put, ABC classification means that you organize your warehouse, and categorize the items that the warehouse consists of to make them more manageable. The categorization is based on how "important" one considers each item or product to be. This “importance parameter” can differ between different companies, but a practice in inventory management is to start from sales volume. The articles are then divided as follows; A ( 20% of the volume), B ( 30 %), and C (50 %). The model can follow different percentages, but it is common to use the numbers in the example.
There is nothing to say that you can only divide the articles into three categories. A rule of thumb, however, is not to use more categories, than that they are still fairly easy to differentiate.
Sharpen the classification using a matrix
To get an even more well-functioning article classification, you can choose to combine several aspects. An example could be combining sales volume with product value, and in this way a matrix emerges , which adds another dimension to the inventory overview and can increase the efficiency of inventory management. Other aspects can be gross margin or frequency.
Based on sales volume - which of course reflects which goods are most important to customers - and product value , the appropriate service level / stock availability is then determined, which then forms the basis for calculating an optimal stock level for each individual item.
Applications for ABC classification
There are many reasons to use ABC classification. Perhaps the most common reason for a company to introduce ABC classification is to have more efficient and fairer order handling and well-functioning product planning. Another reason is of a more practical nature, namely that you want to create a warehouse that is easy to work with. The items that are picked most often should, of course, be in the most easily accessible parts of the warehouse.
After all - time is money, and the better control you have over your stock, the better the result.