What is ABC Inventory Management and How is it Beneficial?
In average retail operations, inventory accuracy is only upto 63%. This is a shocking statistic as inventory accounts for one of the most important aspects of any eCommerce business. Many businesses do not take inventory seriously or do not give it as much attention. This often leads to stockouts and other situations where the customer experience deteriorates.
But with changing times and increasing competition in the eCommerce industry, you cannot afford to take your inventory and fulfillment lightly. Therefore, we have an inventory control and analysis technique – ABC inventory technique, that can help you improve your inventory management and yield better results for your business.
Let’s dive into a general overview of ABC inventory management and why it is essential for your business.
What is ABC Inventory?
ABC inventory refers to a process of inventory management in which the stock is divided into three tiers based on their economic importance. These three tiers are usually labeled as tier A, tier B, and tier C.
It is based on the principle that not all inventory is useful to generate the same profit; therefore, they have a different significance in the entire fulfillment and eCommerce cycle.
These tiers help identify items and segregate them, which further helps save up on overall inventory costs.
The ABC inventory management analysis method follows the Pareto principle. The Pareto principle states that 20% of a company‘s activities generate 80% profit and output. Therefore, you must lay a focus on activities and products that create the most robust sales and profits in your business.
Three Components of ABC Inventory
ABC inventory is divided into three parts.
A – This refers to the tier that has the products with maximum value and lowest sales. Therefore it is essential to prioritize this so they can be stocked accordingly.
B – The B tier contains the items that have a medium value. They account for over 30% of the total inventory and contribute to over 15 to 20% of the annual sales and profits.
C – This category contains products with the lowest value and accounts for the largest number of quantities.
Application and Advantage of ABC Inventory
The ABC inventory model can help you segregate your inventory into different categories according to the sales and item cost. With this, you can easily focus and nurture the top sellers and not pay as much attention to the rest. If you keep stocking all your inventory in equal amounts, there is a chance that you might be overstocking and eventually paying extra for storage and warehousing.
For example, if you sell watches, there will be different categories of watches that you sell. Some might be premium brands, some might be medium brands, and the others will be the cheaper brands. But, you will not stock up all three categories in equal amounts. The premium brands are costly, and it would not make sense to stop them in large numbers if the sales are not adequate. You can segregate your inventory with the ABC inventory management technique, and see which item brings in the top deals, and stock it up accordingly.
Here are a few advantages of the ABC inventory management system that can benefit your eCommerce business.
Simplified Time Management
The ABC inventory management technique helps you save on time and resources as you can see which products are taking up the maximum priority for your business. And allocate your resources to more pressing tasks and save up ample time from inventory management.
When you are running your fulfillment operations or tie-up with a 3PL partner, you need to optimize your inventory to see which products are getting you the most profits. Without an inventory analysis technique like ABC inventory, you will not understand your top-ranking products. With this technique, you will check out the low performing products and only ship the top priority products to 3PL companies. This will help you save time, additional costs, and over-stocking of products.
Forecasting Sales Demand
With regular application of the ABC inventory management technique in your fulfillment operations, you will understand your top-performing products. You will be able to prioritize them over the low performing products. Over an extended period, this will give you an idea of your customers’ demands, and you will be able to predict future sales based on your existing data. With this, you will anticipate your inventory better and analyze your sales with rich insights.
Improved Customer Service
With inventory prioritization, you will provide much more optimized customer service to your clients. You can train your staff according to the products and tears to clarify the client’s queries appropriately. Since you will have dedicated teams for specific products, you will give a much more streamlined and insightful service to your customers. This will also make it personalized, and clients will fulfill every request end to end with thorough knowledge of products and services.
Finally, if you can segregate your products based on the demand, you will negotiate for a better price. Often, sellers cannot demand a fair price for their products because they feel that giving a discount on every product will help them achieve profits. However, suppose you analyze your inventory appropriately and follow the ABC inventory management control technique. In that case, you will identify your top sellers and demand a better price for them.
The ABC inventory management technique can be a win-win application for your business as it will give you an edge over inventory management. If you do not have an inventory control technique in place, it might lead to half of its inventory management process that can lead to a loss of time, money, and resources. Therefore, try the ABC inventory management technique to segregate inventory and optimize your eCommerce business.