Process: Inventory – ABC, 123

Depositphotos_62251109_l-2015With apologies to the Jackson 5. Are you counting your inventory monthly or annually? STOP IT NOW. Cycle count or don’t count at all. Utilize ABC methods and improve your inventory, inventory losses, cut scrap and gain control. So we have three ABC’s. First is Activity Based Costing, that is not what we are going to cover here. But there are two other ABC methods that you should be using. First up is the accounting based ABC. In this method, inventory is looked at thru the lens of value. Items in the A category are typically high value and/or account for about 80% of the inventory value. They may not be a significant quantity of items just high in value. C items are low value and they could be high quantity think fasteners, screws, etc. Everything else is a B category. This is simplified for discussion purposes since you could probably write a book on inventory valuation and analysis. The second ABC method looks at inventory thru a supply chain lens. Using the Pareto principle also known as the 80/20 rule, we see that the A items account for 70-80% of the total annual consumption. Note carefully that this is item based and NOT value based which is a critical point. If you are managing your inventory well, you might have only 1 week of the A items in stock at a given time which may be a small percentage of the inventory value at that time. But you might be turning this inventory over 60 times per year. C items are only going to be about 5% of the usage for an entire year. They would typically turn over less per year than the C items.   It might also be that they are high value and could be over 20% or more of the total inventory value. That’s why it’s important to look at inventory through BOTH of the ABC lenses and use them to balance inventory for your company. It’s not either or situation but rather a both situation. Using these will help you manage and reduce your inventory investment as well as maintain turnover. Now back to counting inventory. After you have established your balanced inventory plan, you need to be performing cycle counts rather than one big annual inventory. You can Google search and find many great opinions on why an annual inventory is a waste of time. Focus your efforts on cycle counting.

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