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  1. 1. ABC Analysis Rajnish Kumar
  2. 2. <ul><li>What is ABC analysis ? </li></ul><ul><li>ABC analysis is done to identify the quality of inventory that a retailer is holding. </li></ul><ul><li>It classifies items based on set criteria of sales and profits </li></ul><ul><li>Why is it done ? </li></ul><ul><li>It helps to understand what is the contribution of various product lines to the profits and which products are blocking the working capital due to slow movement. </li></ul><ul><li>Then outcome is to optimize the inventory so as to have the most efficient products in your line </li></ul>
  3. 3. What is A,B and C ? <ul><li>When carrying out an ABC analysis, inventory items are valued and then ranked. The results are then grouped typically into three bands. These bands are called ABC codes : </li></ul><ul><li>A class inventory will typically contain items that account for 80% of total value, or 20% of total items. </li></ul><ul><li>B class inventory will have around 15% of total value, or 30% of total items. </li></ul><ul><li>C class inventory will account for the remaining 5%, or 50% of total items. </li></ul><ul><li>Nomenclature remaining the same the classification parameters may change based on business realities and requirements. </li></ul>
  4. 4. The Pareto Principle <ul><li>The Pareto principle also known as the 80-20 rule or the law of the vital few states that, for many events, roughly 80% of the effects come from 20% of the causes </li></ul><ul><li>It is a common Thumb rule in business. </li></ul><ul><li>Ex : 80% of your sales can come from 20% of your products or 20 % of your clients give you 80 % of your business. </li></ul><ul><li>20 % of the rich countries contribute more than 80 % of the world’s GDP and 20 % of India’s Population pays 80 % of the Tax collected ! </li></ul>
  5. 5. ABC in Category Management <ul><li>Like many other areas the ABC analysis is widely used in category management too. </li></ul><ul><li>Buyers may use sell thru % analysis to arrive at the top 20 articles and then see what percentage of sales or margin they are responsible for. </li></ul><ul><li>The sell thru analysis is a factor of denominator or base on which the sell through is determined so if the base is small then it may cause a big variance in terms of contribution to overall sales </li></ul><ul><li>It simply means that if we only purchased 100 pieces and 80 of them got sold across 20 stores then this product may not have a significant role to play in overall sales or profitability </li></ul><ul><li>Therefore, it is important to look at sell thru % in conjunction with absolute qty sold and its value before taking any decisions </li></ul>
  6. 6. Inventory Optimization <ul><li>A simple tool that may be used to optimize the inventory is to measure inventory efficiency </li></ul><ul><li>Inventory efficiency can be defined as % contribution of a product or a sub cat to sales divided by % contribution to the stock of that category. </li></ul><ul><li>Inventory efficiency of 1 suggests that the product in question contributes equally to the sales as well the stock so it may be continued </li></ul><ul><li>Similarly an inventory efficiency of 0.5 tells that the product is not doing well and may need to be discontinued or reduced in buying value. </li></ul><ul><li>An important observation is that an efficiency of greater than 1 for Ex. Inventory efficiency of 3.5 may suggest widespread stock outs and the fact that the product is not getting replenished as frequently resulting in lost sales </li></ul>
  7. 7. What Actions to take ? <ul><li>After classifying items into ABC following actions may be initiated : </li></ul><ul><li>Increase buying of class A items and increase investment in Inventory of these products </li></ul><ul><li>Reduce or eliminate items which are C class items as these products probably do not meet the value expectations or taste of the consumer </li></ul><ul><li>Inventory optimization is a continuous process and the items may keep falling in ABC or categories as the market evolves, new competition emerges and the business lifecycle of the retailer attains maturity. </li></ul>
  8. 8. Impact of ABC analysis <ul><li>Improved Working capital </li></ul><ul><li>Freshness and relevance of Merchandise </li></ul><ul><li>More efficient resource planning </li></ul><ul><li>Reduced manpower requirement </li></ul><ul><li>Consolidation of suppliers </li></ul><ul><li>Higher In stock % </li></ul><ul><li>Customer satisfaction </li></ul><ul><li>Better space allocation </li></ul><ul><li>MORE from LESS is the Net effect </li></ul>