This article is part 3 of a 3 part series on ABC Inventory Analysis.
Part 3 Shares a few tips on properly conducting ABC analysis.
ABC Inventory Classification Best Practice
The key to establishing a successful ABC classification system is trusting its design and following a few best practices. Below are a few tips and considerations related to ABC analysis.
Keep ABC Classifications Up to Date
In order for ABC item classification to be meaningful, you must ensure that it reflects your plant’s actual inventory. That doesn’t mean you need to redo your classification every time you add a new part to your operations. In fact, DON’T do that! However, it is vital to make a habit of refreshing the information at certain times:
- Annually: Except in the special situations that follow, you should expect to update your spreadsheets once a year. Some fiscal data needs to be made current on a monthly or quarterly basis, but the ABC classification does not.
- When large-scale changes are made: If there is a significant modification in parts or MRO materials between annual updates, it’s a good idea to refresh your classification. Examples include any time a line of parts is added or removed or a significant number of your standard costs is updated.
- When the total annual spend of all parts shifts by at least 10%: Other times when an update might be necessary are when new business models affect the spending. Making changes to your clientele or relocating to a new region are times when this may occur.
Keep ABC Classification Simple
One of the successes of the ABC method is its simplicity. It may be tempting to try to add some micro-organization into your spreadsheet by adding more classes (i.e., adding class D, class E and class F), but resist the urge. Instead of making it more customized, you will just make it more complicated. The same is true about adding subgroups within your A, B and C parts. Not only will it be more difficult to maneuver, but you also risk losing valid information.
Use ABC Classification
Classifying your inventory items is not a set it and forget it strategy. The information alone is worthless. Use ABC classifications to determine what parts should get the most attention. Since A and B parts represent 95% of what you spend, they would ideally get the bulk of your focus. Not only that, but the Class A’s and Class B’s also make the biggest changes in on-hand dollars and inventory turnover.
Of course, that doesn’t mean that you should ignore your C components. While they may have a low (seemingly negligible) standard cost, they tend to require much higher order quantities relative to demand. It is vital to keep in mind that even though the total class C spend represents 5% of total inventory spend annually, C parts typically represent far more than that in terms of on-hand dollars. Class C items often represent as high as 20% or more of on-hand inventory dollars, and thus tend to have unusually high carrying costs in addition to their relatively high ordering costs. Neglect C items at your own peril.
ABC is Key to Kanban
The most common goals of implementing Kanban is to reduce spending, reduce on-hand inventory, and to increase on-time deliveries without the costs of rush orders. ABC classification, diligently prepared and maintained, is a non-negotiable prerequisite for implementing successful Kanban system and realizing Kanban’s many benefits.
ABC vs ABC
Since the ABC classification affects target lead time and safety stock, it’s important to consider the difference between current ABC and recommended ABC.
- Advantages: It keeps consistency for parts that fall near the threshold of classes.
- Disadvantages: Erroneously classified parts will not receive the correct amount of attention, leading to problems in stock and lead time.
- Advantages: It can be used to fix errors of inaccuracy that come from current ABC.
- Disadvantages: It is sensitive to the daily changes in demand, which can negatively impact target lead times and safety stock.
The benefits of proper ABC classification are plenty and vital for fully optimizing inventory operations. While ABC analysis is fuels continuous improvement it requires dedicated effort and regular attention.