Performing an ABC analysis is a way of categorizing (and prioritizing) your inventory according to how important they are to your sales. You can apply this principle to multiple aspects of your inventory, however the most common is simply based off sales. In short, you’re recognizing what sells better so you can focus on ordering that product more. This will also help you find opportunities for your advertising, or even add-on products.
Have you ever heard of the 80/20 rule?
This is an inventory principle that states; in most cases 80% of your sales (or units sold) is based off of only 20% of your overall inventory. That 20% of your inventory is your rent payers, the rest is all supporting products. ABC categorization helps you break down the 80/20 rule into easy to identify items.
ABC categorization may not simply be just on volume of sales, the key is looking at overall profits. Let’s say that you sell Product A 20% slower than you sell product B, however when you do sell Product A you make a better profit. Now we have to make the decision on which product to focus on, the faster selling, or the more money-making?
This same example can play hand in hand with seasonal and economic changes throughout the year. If you’re in a busy season, it is usually best to focus on selling in volume. This is where that faster moving Product B comes into play. However, when your sales start to slow down, you change gears with it, focusing on getting the most profit out of each customer.
This kind of categorization can help tremendously when placing replenishment orders for your business. Let’s say you’re getting ready for your Annual Black Friday Sale. Do you just make a giant, blanket order stacking up on every item in your store? That’s not the smartest thing to do, because now your stuck with all that slower-moving inventory that didn’t sell during the big sale!
To make things worse, because you didn’t focus in enough, you sold out of your bestselling product halfway through and missed out on some big money! Instead, focus on ordering bigger runs on the stuff you know will sell. This way, you won’t run out of stock during the sale! Worst case, after the sale your only stuck with product that you know will still move regardless of the sale.