ABC analysis is a powerful inventory management technique that helps you categorize your products based on importance, allowing for more efficient decision-making.
In this guide, we'll explain how to conduct ABC analysis and how to feed the results of this analysis back into your inventory management.
What Is ABC Analysis?
ABC analysis divides inventory into three categories (A, B, and C) based on their contribution to sales or consumption. This method helps prioritize resources, focusing on the most valuable items (A), moderately important items (B), and less critical items (C).
Categories Explained:
- A items: High-value or high-turnover products (contributing 70-80% to your sales revenue).
- B items: Moderate-value products with moderate sales frequency (contributing 15-20% to revenue).
- C items: Low-value and/or low-turnover products (contributing only 5-10% to revenue).
Benefits of ABC Analysis:
- Better inventory control: Focus on managing high-priority items efficiently.
- Cost reduction: By optimizing stock levels of C products and closely monitoring A products, companies can reduce costs.
- Improved decision-making: Helps you set accurate reorder points and restock levels. With these in place, the Stock Replenishment report in Erply will automatically create prurchase orders for you.
Now, let's dive into how you can perform an ABC analysis using Erply.
Step-by-Step Guide to Perform ABC Analysis in Erply
Step 1: Export Sales or Inventory Data from Erply
To start your ABC analysis, you need to gather the necessary sales or inventory data. You can export the data by following these two options:
Option 1: Export "Cost of Goods Sold" Report
- Navigate to "Reports" > "Sales" > "Cost of Goods Sold" in Erply.
- Filter the report by the desired date range, then export the report in Excel format.
Option 2: Export "Products in Stock" Report
- Navigate to "Reports" > "Inventory" > "Products in stock". Specify a date range for which you want sales data to be included.
- Export the report in Excel format.
Step 2: Perform the ABC Analysis in Excel
Once you've exported your report to Excel, follow these steps to categorize products into A, B, and C groups:
Organize Data: Arrange your products by total sales value or inventory turnover ratio (Sales quantity ÷ current on hand quantity).
Calculate Cumulative Percentage:
- For sales-based ABC analysis, calculate the cumulative percentage of total sales for each product.
- For inventory turnover-based ABC analysis, sort your products by turnover multiplier (sales quantity ÷ quantity on hand), then calculate cumulative percentages based on turnover.
Divide Into Categories:
- A Category: Items that make up ~80% of the revenue — or the top 20% items with the highest turnover multiplier.
- B Category: Items that make up ~15% of your revenue — or the next 30% items by turnover multiplier.
- C Category: The rest.
Label Items: Assign each product to an ABC category in your Excel file based on the cumulative percentage and sales contribution.
Step 3: Import ABC Categories Back Into Erply
After completing the ABC analysis, you need to import the results back into Erply.
Create Priority Groups (A, B, and C):
- Go to "PIM" > "Priority Groups" in Erply.
- Create new priority groups A, B, and C.
Prepare Your Excel File for Import:
- Make sure the Excel file contains columns for the product codes and their corresponding ABC category.
- Ensure the format is compatible with Erply’s import functionality.
Import the File:
- Navigate to "PIM" > "Import products" in Erply.
- Select the file you prepared and upload it. Erply will update the product information, assigning each product to its respective ABC category.
Step 4: Use ABC Categories to Optimize Inventory Management
Once the products are assigned to A, B, and C categories, you can begin optimizing your inventory management:
- Prioritize A items: Ensure that stock levels of A items are always sufficient to meet demand.
- Monitor B items closely: Adjust reorder levels as needed based on moderate sales and demand.
- Optimize C items: Minimize overstocking and reduce costs by holding lower quantities of C items.
Conclusion
Performing ABC analysis with Erply is a powerful way to streamline your inventory management and improve decision-making. By exporting sales or inventory reports, categorizing products in Excel, and importing the data back into Erply, you can take control of your inventory and focus on what matters most. With efficient management of A, B, and C products, you’ll reduce costs, optimize stock levels, and ensure your business runs smoothly.