What is ABC analysis?
The goal of ABC analysis in logistics is to optimize inventory management. The most important factors include: storage costs, inventory value, physical storage, inventory levels, percentage of total inventory, percentage of sales, etc.
The method is based on a three-tier classification (ABC classification) of the products or goods in the warehouse. The principle behind ABC analysis is very simple. However, the effort required to prioritize and make decisions regarding each item demands significant resources in order to assign them to the ABC classes. This is also the biggest drawback of ABC analysis. The resulting value is always a compromise.
ABC analysis is of great importance in any warehouse.
The goods are distributed or consolidated in the warehouse according to various priorities (routing, total value, customers, category, etc.). Before distribution, the proportions must be calculated correctly.
The presentation of the figures (usually as percentages) is based on data collected using various tools. Today’s IT systems offer clear advantages. There are no limits to creativity here. Despite the technology, the components of the ABC analysis must be approached with common sense. This task is an ongoing process of analysis and refinement.
ABC analysis in the warehouse also helps in deciding which picking methods to use (such as pick-by-light, Voice Picking, Pick-by-Point, etc.).
History of ABC Analysis
The general ABC analysis was developed by the renowned Italian economist Vilfredo Pareto (1848–1923). H. Ford Dickie, a manager at General Electric, further developed the method in the 1950s and applied the results to the field of materials management.