21 November 2021 Inventory management can be a significant challenge for managers. Defining positions for each product, knowing the right time to restock, and trying to reduce movements are some aspects that need to be considered. And not only that. It’s necessary to have excellent cash flow management, using the least inventory capital possible (after all, warehouse costs are high) while maintaining the ideal quantity stored to provide a high level of customer service. The calculation is simple: too much stock can tie up capital, a figure that could be invested in more profitable destinations. And too little stock can also lead to a lost sale because if the product is not available when the customer requests it (stock out), it is very likely they will leave your company and migrate to a competitor. That’s why the keyword is balance. How to achieve this balance? Rely on the right tools. One of these that helps a lot is the ABC curve or Pareto’s theorem. Its origin comes from the theory of Italian economist Vilfredo Pareto, who, through a study, found that 80% of the wealth was concentrated in the hands of only 20% of the population. Subsequently, other studies were conducted following the 80/20 ratio for cause and effect analysis. In logistics, the ABC curve is used to classify and group stored products based on their importance to business performance. Items are divided into: • Class A: about 20% of the items that account for about 80% of sales; • Class B: about 30% of the items that account for about 15% of sales; • Class C: about 50% of the items that account for about 5% of sales. ABC Curve For an effective ABC analysis, it is necessary to consider both the cost of the item and its turnover (the speed at which it is sold). In terms of turnover, you can review the last 12 months of sales and determine the average monthly sales for each item. It is also worth considering future sales forecasts, which must contain sales peaks in particular periods (e.g., holidays, Black Friday, Christmas, season changes, etc.) and marketing campaigns, as it may happen that a small requested item is more sold during these periods. It is important to note that the figures mentioned above can vary from company to company, so it is not a fixed standard but a percentage reference to guide the manager’s work. It is also worth adding that the ABC curve can be used to classify a wide range of inventory items, whether raw materials, components, parts, manufactured finished products, and unfinished products. What are the policies that regulate the ABC Inventory Curve? After classifying the products in your inventory as Class A, B, or C, it’s time to give the ideal treatment to each of them, as detailed below: Class A items: – Must receive strict inventory control – Must be located in highly secure and privileged areas (lower positions, allowing easy and quick access without the use of machinery, for example) – Must be inventoried frequently – Must be kept as priority items, with a great effort to avoid their unavailability (stock out). Class B items: – Do not require strict control but also need regular review. Being between Classes A and C, if there is a variation in demand (more or less), they can migrate from the category. Class C items: – Do not need to be as strictly controlled as the first two groups and probably will not be inventoried as often. Advantages of ABC Analysis Stock optimization is crucial to keeping supply chain costs under control. If there is no optimal control, the company could waste capital on purchasing low-production products and the related warehouse costs. On the other hand, if an item is out of stock, there are losses related to the loss of a sale. Therefore, we can say that the purpose of ABC analysis is to ensure the financial health of the operation. With this product classification strategy, you can focus your attention on the few critical A items rather than the many trivial C items. From there, you will be able to direct your working capital where there is the highest return on investment. And again: with ABC Analysis, you can also develop strategies to move out of C items, either through marketing campaigns or through Kit formation. Besides this main advantage, we can also mention other benefits, such as: Shelf Life Management To avoid losses within the CD due to expiration dates, it is necessary to determine an expiration date (shelf life) for the receipt of goods. And this control must be even more judicious in C items, as they have less output. So, we can say that using the ABC curve helps manage the useful life of each product. Negotiation with Suppliers It is obvious that the company would earn more by negotiating with Class A suppliers since 70% – 80% of the money is spent with them. And with the ABC Curve, it is easier to make these negotiations because the manager knows exactly which products deserve your attention. Besides negotiating the price of items, other benefits can be discussed, such as post-purchase services, reduced advances, free shipping, etc. Inventory in Line with Demand Inventory optimization is a popular advantage of the ABC curve as it allows inventory planners to organize high-priority items in line with customer needs. It is possible to identify which items have more outlets and which have fewer, thus allowing purchases at the right time, at the right moment, and in the right quantity. This way, customers will always be satisfied with their requests. Strategic Pricing ABC Analysis helps you set prices very strategically for products that add more value to the company. Products that are highly desirable to customers and increasing in demand should be monitored. Based on this data, the company can make changes to the price of these items, which will have a significant impact on profit. Another strategic pricing option to consider is supplier consolidation or transferring business to a single supplier. Buying more products from a single supplier will reduce shipping costs and related costs. Optimized Logistics When using the ABC curve, the operation becomes more organized and efficient, where products with the highest value/highest turnover are placed in privileged addresses, thus facilitating picking, reducing movements, and speeding up order processing and shipping. Common Mistakes When Using the ABC Curve As highlighted in the previous topic, the ABC Curve helps companies optimize their working capital, reduce maintenance costs, manage inventory, and restock, among other gains. However, to achieve these benefits, it is also necessary to consider situations that require special treatment and attention to be adopted, such as: Opportunity Purchase If a supplier offers you a promotional price to purchase a certain quantity of items or if there is a forecasted price increase, it is natural to choose to buy in larger quantities in view of future profitability. However, it is important to consider issues such as the average sales time and the amount of working capital that will be used for this purchase. Validity, Novelty, and Seasonality When purchasing a valid item, it is essential to consider the average check-out time to determine the expiration that will be received. Products that are frequently updated (e.g., mobile phones) also need attention at the time of purchase so they do not become obsolete items in stock. And seasonal products need to be evaluated individually so that they are purchased at the ideal time and quantity. Frequent Review of the ABC Curve When you do not have a routine to review the ABC curve of your inventory, the management of certain products can become unprofitable, as it is common for changes to occur in the price or quantity of items sold, for example. This may require changes to the ranking. In this sense, frequently reviewing the curve is a way to ensure that your inventory is always organized and optimized and to manage your resources well, avoiding spending on items no longer representative of your business. Evaluate Your Business Today Were the tips presented in this text important for rethinking how you manage your inventory? Take the opportunity to review the classification of your products and warehouse organization strategies and remember: with the right tools, you will be able to reduce costs and maintain high productivity in your operations. What is the ABC Curve and How to Use It in Warehouse Management Deagor WMS per ecommerce può aiutarti!