Which products, customers, or purchased parts are the largest contributors to your company’s success? This is one of the most important pieces of information that a company’s management must-have.
ABC analysis is based on “The Pareto Principle,” also known as the 80/20 rule. According to this principle, 80% of the gross revenue comes from the efforts put in by just 20% of the workforce. An ABC analysis helps you clearly assess this effort and also shows the importance of individual factors to the business.
For instance, ABC analysis helps you find out which customers are the biggest contributors to your overall turnover and which products have the highest cost of manufacturing. This data is very important for making future business strategies.
There are two main reasons to conduct an ABC analysis:
Before starting the process of analysis, collate the information that has already been analyzed by any accounting tool. This data must be linked with the yearly expenditure. This may cover all the spending of all orders, carrying costs, and others. Focus on the easily-available data.
Classify the items present in your inventory in descending order of impact. This means beginning with the ones that are the most expensive and ending with the least expensive.
For calculating the cumulative effect or impact, all these item details must be entered into a spreadsheet. This is to find out the total impact on your business. All the items are divided according to their annual costs. The sum thereby is added to the cumulative total of the percentage spent in the entire year.
This is where the “Pareto Principle” comes to play in theory. This requires you to negotiate your contracts with the manufacturer, develop a strategy on the product prices, make sure that valuable products are available, etc.
The products that generate the maximum revenue will top the charts. On the other hand, those with lower revenues will follow. Just a few important products will turn out to be most lucrative, and the insignificant ones will decline in the list.
You must constantly monitor the prices and the sale efficiency of the items to ensure that they are positioned right.
Walmart has an inventory management system that has been instrumental in the company’s potential to reach its current height in the industry and as the foremost retailer globally. Walmart’s inventory comprises of:
Every item in the inventory has a different value. Understanding the value of ABC analysis is one of the most important factors for the success of your business. Take time to do an ABC analysis for your business and see how it boosts your inventory!
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