Supply Chain Management Inventory Classification

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Manufacturers, Distributors and Retailers may have hundreds to thousands of items. As a result, it can become extremely difficult to manage all of these items.

ABC Analysis can be quite useful to help management focus on a smaller number of items, which typically account for a high percentage of the volume or value of all items in inventory (called the “Pareto Principle” or “80/20” rule). Thus it is used to establish policies that focus on the few critical parts and not the many trivial ones

The ABC system organizes its inventory into three (or more) groups - A, B and C.

The A items are a relatively small number of items that generate a large percent of a company’s unit or sales volume and typically, account for a large percent of the company’s inventory investment. B items are the next largest group and the next largest investment. C items typically represent a small volume of sales dollars or volume but the greatest number in terms of number of items.

By classifying inventory into A, B and C items, company’s can determine the levels of inventory to hold and the types of inventory control procedures to use.

The same type of classifications also applies to the forecasting process in terms of forecasting methods used, time and effort spent on the forecasting process as well as targeted and actual forecast variance.

LPA, LLC is a Supply Chain software and consulting business offering affordable, easy-to-implement solutions to complex planning problems. Our Managing Partners have over 40 years of combined Supply Chain and Information Systems experience.

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