ABC Stock Analysis
Enterprise & Corporate Edition Only
ABC Stock Analysis is a method of classifying stock items according to a ranking criteria that determines their importance. The ranking procedure groups stock items on user selectable performance criteria, such as cost, sales, profitability, turn-over, or a user defined ranking. This allows a firm to focus attention on inventory based on the relative importance of those items to the organisation.
ABC ranking systems are useful because many types of businesses find that the '80/20' rule may be applied to them. For example, that 80% of all sales are generated from around 20% of stock holdings. For obvious reasons it is important to be able to distinguish between the top performing items from other items in your inventory pool.
The first step in an ABC Analysis procedure is to identify what criteria is appropriate for your organisation for stock rankings. For example, if you purchase inventory from manufacturers (either locally or from overseas) and sell this inventory to other resellers or directly to the end-user, then total sales turn-over may be the most important ranking critieria. This will allow you to rate your inventory based on its importance to your organisation in terms of its income generating capacity. If your business was primarily focused on product distribution (e.g., the bulk of your income was generated by delivering goods rather than selling goods), then your stock ranking might be based on turn-over (units moved) rather than sales.
In any business that deals with inventory, more careful monitoring and control is needed for fast moving, high value stock items, then for low value, slow moving stock items. In particular, for slow moving stock items, close monitoring may actually be more costly than the income generated from such items. ABC Stock Analysis is a straightforward way in which to separate your important inventory from your less important inventory.
Ranking Codes
ABC Stock Analysis uses a simple, user configurable, ranking code system to classify stock items. Highest priority stock items are ranked 'A', the next highest 'B' and so on. You may have as many different ranking classifications as you wish, up to ranking code 'Z'. This allows for 2-26 different classifications for your inventory.
A typical ranking system might take the following form:
|
Ranking Code (Class) |
Rating % |
Meaning |
|
A |
10 |
Top 10% |
|
B |
20 |
Next best performing 20% |
|
C |
20 |
Next performing 20% |
|
D |
20 |
Next performing 20% |
|
E |
20 |
Next performing 20% |
|
F |
10 |
Worst performing 10% |
You can easily change the ranking system to meet your specific business needs, either by adding or removing additional ranking codes and/or by altering the percentage ranking values.
Once you have established a suitable ranking table, simply select your ranking criteria and then press the button.
ABC Stock Analysis Ranking criteria
Cost
Select Cost as your ranking criteria if you wish to rank inventory based on its cost value to you. Cost calculations always exclude any tax related charges.
Sales
Select Sales as your ranking criteria if you wish to rank inventory based on its sales value to you. Sale calculations always exclude any tax related charges.
Profitability
Select Profitability as your ranking criteria if you wish to rank inventory based on its profitability. Profitability is determined as sales ex tax minus recorded costs ex tax as at the time of the sale.
Units
Select Units as your ranking criteria if you wish to rank your inventory based on its turn-over. These are units moved through your system in sale related and other activities.
Stock
movements generated by stock transfers are counted as well.
Ranking Base
Sales History
In order to determine cost, sales, unit movements or profitability, the ABC Stock Analysis utility must scan your system's previous sales (and relates activity) records. Enter the number of days that the system should scan backwards in time, in order to allow it to determine rankings. The default is 180 days from the current system date (6 months). You may specify any number of days between 1 and 9999.
Exclude Items With Insufficient Sales History
If this setting is ticked 
the stock item's sales history is ignored if there is insufficient sales history for the period of cover
specified.
If the period of cover is 90 days, and no sales are recorded in the system prior to that period, then items will not be ranked if this option is ticked. This is useful when you do not have sufficient sales history in your system, particularly for a new item, and you do not wish to assign it a ranking as yet, as the ranking value may not be fair. In this case, for items that cannot be ranked, the class of the item is left blank.
Ranking Code For Items Without Sales
If a value between A-Z is entered here (normally Z is entered here or the last ranking in your table of rankings), then this ranking is assigned to all inventory where no sales have occurred on those items for the specified sales history period.
How
Ranking Works
It is important to understand how the the ABC Stock Analysis utility works before you begin to use it, as a misinterpretation of how it does its calculations may lead to mistakes.
The system begins by examining each product's sales and movements history. It assigns a percentage to each item based on its performance for the specified time period.
It then determines the number of items found in the history, and examines the percentage ranking categories defined. It then works out how many items fall within each of these rankings. For example, if there are 1000 items in the sales and movements history, and rank A represents the top 10% of performing items, then the first 100 items with the highest sales percentage will be classified as A. (10% of 1000 equals 100.) The calculation proceeds to do the same for rank B, C and so on, until all items have been ranked.
It should be noted that exceptions to this process may occur when an item has insufficient sales history or has no sales in the specified period.
Guide To How ABC Stock Analysis Ranks Exceptions
The table below illustrates circumstances where product ranking does not occur. 'Exclude' refers to the setting Exclude Items With Insufficient Sales History being ticked. 'Include' refers to it being unticked.
Hints & Tips
If a stock item is relatively newly created and its creation date is later than the beginning of the sales and movements history being examined, then the item will not be ranked if Exclude Items With Insufficient Sales History is ticked. This policy attempts to prevent relatively new stock items from being ranked low due to insufficient time to achieve activity.
Stock items recorded on sales type 8 transactions (no stock adjustments applicable) are ignored by the ranking procedure.
Costs are not estimated for cash orders using this facility.
Stock transfers are considered in all ranking procedures.
If your stock control screen does not contain a Class field, it may be added using the Screen Builder. The name of the field code is STCLASS.
All stock items are assigned no ranking (blank) before re-ranking commences. Previous rankings are NOT held if stock items do not have any sales for the specified sale and movement period history .
Non-diminishing stock items are ignored (not ranked).
Stock items placed on stock hold are ignored (not ranked).
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