- What an ABC analysis is
- How you can implement it
- How Walmart uses it in its daily business
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.
Implementing ABC Analysis
- Zero in on the component for analysis and specify the success parameters
There are two main reasons to conduct an ABC analysis:
- To ensure that the supplier rate is kept most competitive (even if it may require substituting any facility that you are offering)
- To maximize the flow of cash by having everything on your shelves that customers demand
- Collate the already-examined information about your inventory
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.
- Arrange your inventory in descending order of impact
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.
- Compute the cumulative effect
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.
- Split your inventory into purchase categories
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.
- Make decisions based on an analysis of the categories
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.
How Walmart Applies ABC Analysis
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:
- Category A items: These are the end products on sale in its stores and the operations equipment. The operations equipment comprises information systems for supply chain management and inventory management. This is the category of components that are recorded under regular systematic observation.
- Category B items: These items are the other supplies or materials that are utilized in operations. They comprise service equipment and office furniture. Items in this category undergo reasonable checks and are not recorded with high precision.
- Category C items: Items in this category undergo minimal checks and recording. Examples of these may be reception and stationery supplies. This category has minimal impact on the company’s routine retail activities.
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!
SupplyPike has created a suite of tools specifically designed to identify pain points in supply chain, and we work closely with Walmart suppliers. See how we can help you today!