Module: ABC Analysis¶

ABC Categorization – computation¶

ABC Categorization is computed using the following methods:

From the historical sales, using

• Sales frequency
• Quantity sold
• Revenue
• Profit

From sales forecast, using

• Forecasted quantity
• Forecasted revenue
• Forecasted profit

From the stock on-hand, using

• Stock on-hand in quantity
• Stock on-hand in value

ABC Categorization is a simple application implemented for a selected method.

Example: Using the input of “Revenue” for the period of one year, we add up the values of revenues during the last year for each product; then the revenues of all products are summed up. For each product, its percentage contribution to the overall revenue is set. The products are then arranged according to their share in the summary revenue, from the largest to the smallest. The products, that contribute to 80% of the revenue, are A category products; the products that contribute between 80% - 95% of the revenue are B category products – the remaining 5% are category C products. D category products are products with absolute contribution of “0”.

The ABC Analysis chart with product categories:

There is an option of combining various methods; then the ABC Analysis is set by computing two or more criteria together. Each of the ABC Analysis is ascribed a certain weight. For us, to compare the incomparable (“to compare apples with oranges”), i.e. to compare revenues and sale frequency, the sales must be standardized and the individual contributions must be weighted according to the weight of the given ABC method.

In the case we deal with a complex hierarchy of warehouses, the central warehouse must have the ABC categories properly set also with respect to the sales of the given product in the subordinate warehouses. Therefore, to set the final category of the ABC analysis for products, product sales from subordinate warehouses are used as well.

In production, raw material is usually not sold – unlike the final products. However, the quantity of raw material used in production must be included in the final sales quantity of the finished product: the ABC category of the final product thus includes the raw material used for its production.

Configuration of the ABC Analysis¶

When setting the ABC analysis, a sole indicator of the performance of individual items can be used (see the default selection options in the section ABC Report). For example, if the company focuses on expansion, ABC categorization by revenue is the best; on the other hand - if the company operates in a saturated market, rate of return seems like the optimal focus of the segmentation – and so on.

For each method based on historical sales or future forecast, it is possible to set what time period (in months) should be taken into account. It is also possible to set whether the A products are those with 80% sale and B products those with 95% sales – or whether the values will be set by the user.

Configuration of combined ABC analysis¶

Using the STOCK GUI, the user can create her/his own combined methods, or he/she can change the weights in already existing methods. In the case illustrated below, the user sets double weight to the frequency of sales compared to a profit.

Setting combined methods is shown below:

ABC Report¶

ABC report presents an overview of the current performance of marketed products or product groups.

Data can be computed for the entire portfolio, or for a selected level of the left menu (e.g., for a specific branch). For the given method, it is also possible to set the period over which the statics is computed – thus, it is possible to easily simulate an outcome different from the period set as default (for details and settings, see the chapter Setting ABC analysis).

The outcome can be demonstrated below using an ABC analysis according to quantity (this is not the default ABC method). The Report allows you to compare the results of the selected ABC method with the results of the default (originally selected) ABC method.

The result of the ABC Report is a chart representing the ABC categorization:

In addition to the visual representation of each category, a list of the items and their corresponding category is available, as shown below.

The charts and lists show “Share [%]” indicating the share (in percents) the given product represents in the sum of all the products.

The column “Computed quantity” shows the actually computed values using the ABC analysis according to the selected criteria.

The column “Quantity” shows the final ABC category. The value might differ from the previous column “Computed quantity”: the user might have changed it and/or the changes follow from specific management rules.

ABC Groups¶

STOCK offers the possibility of creating groups for ABC analysis. This feature is useful if there are (in the customer’s company) two rather different parts, such as different regions or various products having a very different orientation. In such cases, it is not advisable to compute the default ABC of these parts together, as one part of the analyzed data could significantly influence (diminish) the importance of the products in the other part. This division is specially advantageous: a more successful branch may distort the analysis of weaker branches where ABC structure of items mightbe different.

Additional ABC categories¶

Basically, STOCK works with 4 ABC categories: ABCD. However, a customer can expand the number of the categories virtually without limits.

You might want to use this function if you have a relatively narrow range of products of extreme importance and you need to categorize them so that they are supremely available (i.e., they have a very high service level). Then, for instance, you create a category A1 and set the availability of items of this category to 99.99%. Consequently, A1 is the category not for the most-selling 80% of the products (as a plain-vanilla A category), but only the most-selling 30% products. Then you create a category A2 for the remaining 31-80% of the products from the ‘original’ category A.

Overriding ABC categories using the SIDI¶

Under certain circumstances, ABC categories as set by purely mathematical algorithms might not be ideal for the company. For example, the company introduces a novelty product that didn’t get a chance to get established on the market so far, but the company promotes it and hence wants the product to have a high service level. Or, say, we deal with a product with a low sale rate, but the company wants to promote its sale by giving it a high service level (thus making it easily available everywhere).

STOCK’s automated input can easily adapt your own ABC category from your information system – or a flag indicating that you want to keep the product in the premium category. The flag will be respected and regardless of the results of the algorithms, the product will be placed in the desired category.

Customization of ABC categories using GUI¶

Customization module can be enabled using Access Rights (expert administration).

The reasons to change the categories are exactly the same as above, i.e. in Overriding ABC categories using the SIDI.

However, this time, the user can change the required ABC category of a product directly in STOCK.

Setting up the custom value: