Is ABC analysis the best option to manage inventory?


- Are there better methods than the ABC analysis to manage inventory?

- When usin ABC analysis, what should be the main factor to organize your stock?
- Volume,
- Sales price,
- Sales quantity,
- Combination of the above,
- ...

Inventory Management
ABC Analysis
Pieter Vissers
69 months ago

7 answers


ABC Classification (Based on importance of the item, A-Very Important, B- Moderate Important, C-Relatively unimportant)
HML Classification (Based on Unit Value, H-High, M-Medium, L-Low)
XYZ Classification (Based value of the stored inventory, X-High value, Y-Medium laue & Z-Low value)
VED Classification (Based on stocks, V-Vital, E-Essebtial, D-Desirable)
FSN Classification (Based on consumption patern, F-Fast moving, S-Slow moving, N-Non moving)
SDF Classification (Based on source/availability, S – Scarce, D- Difficult, E- Easy)
 GOLF Classification (Based on source/availability, G – Government, O – Ordinary, L – Local, F
– Foreign)
 SOS Classification (Based on Seasonal availability, S – Seasonal, OS – Off seasonal)
EOQ (Economic Order Quantity)
Multi-Criteria Inventory Classification (MCIC) such as AHP-K-Veto (The sorting is performed on each single criterion, where a veto system prevents an item evaluated as high/bad on at least one criterion to be top/bottom ranked in the global aggregation)

Samares B
69 months ago

First In First Out (FIFO) is another option. The first stock arriving in the warehouse is then the first sent to stores and consumers. It fits to products with a short deadline (e.g. food) or obsolescence (e.g. technology)

Paolo Beffagnotti
69 months ago

Utilizing ABC depends on all factors noted, however highest volume and turnover materials are classified as 'A' materials. And within that, critical materials fall in the A class. Anything that has an extended shelf life and is used less freq falls into C.

Damian Gillett
69 months ago

Inventory management is a question of the approach you are looking for. As mentioned by some of the feedback FIFO methodology can work and should in general be part of your ERP system with managing inventory.

ABC analysis provides an additional layer on how you treat the inventory you have. You can use different factors to perform, however, value would be the best approach as it standardizes all items.

I would suggest combining ABC with the XYZ approach which allows for differentiating your inventory management approach using segmentation. It allows you to determine through usage / volatility of usage and value how best to manage your stock.

Sam Rabi
69 months ago

Hi Pieter i hope you are good!

The ABC analysis is a great way to segment your portfolio, and then create the inventory policy to manage it.
When doing the classification is better to use a mixure of TurnOver, Profit, and forward forecast. For example I have use a a 40%, 30%, 30% split, what ever is important for your company.

A special WATCH OUT for SKUs with high variability you should sub-segment them
within their ABC class, just because you may want to treat them differently in terms of the replenishment policy, and the service level you will set them to.

I hope this helps, and if you want to discuss further please reach out! I have an outsourcing company of Supply Chain fundamental processes such as stat forecasting and inventory policy.


Jorge Serrano Carbajal
69 months ago

There is no generic rule and it all depends on the Products that you manufacture or Trade and the DNA of the organisation you work for (Service Oriented, Innovation oriented, Asset based etc etc)

For example if you marketing time sensitive/ temperature sensitive products like (Perishables, BioScience, Cell/ Media culture, Food product), then product efficacy/ expiry date/ Temperature contorl is so critical that you must always ship First In First Out in a proper form/ package. There is no negotiation here. If your product does NOT fall in these categories then you can apply other Product specific practices.

On a pretty generic level, you can leverage Pareto analysis since that will tell you which products categories are contributing to a higher degree of Revenue. Typically these are volumes, high runners which you need to make/ buy/ source consistently so the pipeline is always never ending to the degree of demand in the future period. Thereafter you can use some of these...Gross Margins, Velocity, make/ source, etc

But remember this is not the only solution. After you do ABC on Products, you must have to to Segment Your Customers in ABC and then the resulting relationship of Product ABC with Customer ABC will provide you a lot of decisions that you need to strategies USTREAM in your supply chain.

Hope this helps...We can take this discussion 1x1 from here if you want..

69 months ago

Hi Pieter,
You've touched on a very fundamental warehousing area which can make the difference between an efficienct picking process and an optimized one. You have alot of great responses above with plenty of information for you to reduce the money spent on your picking through better storage strategies (aka ABC analysis, Slotting etc).
A few points i would like to add based on what i have seen work well;

  • Where there is a large quantity of SKUs, break down their storage into groups based on physical size or storage type, as well as whether they are picked as individual pieces, full cases or complete pallets/large units, and use a storage method which would make picking very efficient. e.g. small items  stored in deep trays on gravity roller shelves all facing the picker - this way the picker has a high pick rate/hour. Items picked as full cases in a dedicated case picking area with accessways for trolleys/forklifts etc. Have each of these storage/process areas placed in the most efficienct place/sequence in your warehouse. Then apply your ABC analysis or placement strategy for each of these locations. In essence, you are creating a nested "Slotting" Strategy, which should net more effieicnt picking versus a general total warehouse ABC or Slotting strategy.
  • Keep the Picker picking - Understand from the Picker, what is preventing him from continually picking - ive heard answers from frontline employees i would never see on Excel sheets, such as "i'm waiting for my screen to load", our scanner batteries are old and i keep having to swap them", "the aisles are too narrow for the traffic", "all the A SKUs are located together so everyone congests in the same point" etc. Through observations, interviews, time/motion studies etc, you may make some changes to the way the WH is laid out
  • Metrics - everyone knows about KPIs and how to use them, but we all get lazy or excited to just jump in and make the changes. Understand where you are today, make the change, let it mature, then understand the improvement. If happy with the cost/benefit, continue with the next change etc.
  • Warehouses are constantly evolving - KPIs, customer needs, manufacturing efficiencies. Be sure to review your processes to ensure what worked in your ABC analysis last year, still works as well this year.

Good luck!

Matthew Theocharous
69 months ago

Have some input?