What is ABC analysis, and why should you use it in your shop?

Purpose:

Introduction

Any retail business's success depends on effective inventory management. You could lose money if you don't manage your stocks. You will need more time to meet your customers' requirements if disorganised. While too little inventory can result in lost sales and dissatisfied customers, too much stock will tie up capital and space.

Fantastic, you may say, but the issue is that there is so much stock that manual control is impossible. You can use your POS Software with automatic ordering (with our AI focusing), a standard manual system, or both using the ABC stock control, one of the most popular methods for inventory management.

Note I will discuss ABC here a few times on the blog so that this post can introduce the ideas. I am sure you will be impressed.

The issue

A typical business can sell tens of thousands of different products annually. One cannot control all these items in your head. Although our AI automatic reordering can be beneficial, it lacks the human element, which is a significant drawback. It knows what happens and estimates what will happen, but nothing about what is happening outside your shop.

Let us start doing ABC Stock control

Deadstock

This is a common problem in retail, so first, let us remove the Deadstock. We define Deadstock as any item that has not sold in the past 12 months based on sales. This stock both cost money to the retailers, ties up cash flow, and money and takes up space that should have stock that sells better.

Now in identifying your products that are dead, go to register reports,> stock titled "Old Stock on hand by Date last received"

I tend to do it in two parts. I check the overall problem in the shop to see the scale of the problem. Then I go by the department in detail as its people find it better to examine this way.

What will you do about it once you have identified it? I would suggest moving it because it may be in the wrong area. A good clean, and excellent presentation can do wonders.

If its really not good well mark it as Deadstock to stop others from ordering it, and stop suppliers who know it's dead stock to try to provide it to you underhandedly!

Here is a simple and effective method.

When you receive stock items in the shop that you'd rather not see again, press edit in your POS Software; see image.

Then mark the stock item where the red arrow is.

Our system will no longer automatically order the product from that time. If it comes, when processed, the stock item will be automatically recorded in the instant return file. As a result, you will be forewarned and have the opportunity to act before accepting the dead stock.

Classify ABC

Now list inventory sales using profit or sales numbers from computer reports. In practice, often, there is little difference; some prefer numbers while others profit. You pick.

So go to Register reports > Stock> Top N Stock Sales for a Given Period.

Now using your ad hoc reports, you will get a screen like this. I made a total column.

There are 10,289 stock lines sold in this shop 

This is what a sales analysis of stock lines by total% looks like, and it is not that far off the 80/20 rule. The top 33% of items had about 80% of the shop sales.

Now the top third of your sold by % (33%) are your A's

So we have here 58, A products. Now commonly, people adjust; you do not want the number of A's between 40 and 100 items as manually that is about as many as you can handle.

The B's are between 33% and 66%

We have almost 1600 of these items.

The remaining items are your C's.

Just over 9,000 items, and most of these are very marginal.

Hence we have now done an ABC Stock Control, also known as the "always better control" method.

implementing ABC analysis 

You can keep track of a significant part of their business in your head by concentrating on your A's. You should advertise those products by placing them in prominent locations where enough customers can see them.  A significant increase in sales can be achieved by making minor modifications to your A products layouts. Here with just looking at 58 items, I have done a third of the shop sales.

Now, look into your Deadstock and C's. These products are not moving or moving very slowly. It may not be the product; you may be charging too much.  Regardless of the narrative, you must act on these items. 

Conclusion

An ABC analysis is a method for maximising your inventory. After analysing your inventory and classifying each item, you can start reaping the benefits of using the data to improve results.

FAQ

Q: How long does the process take?
A: It took me here in under 15 minutes.

Q: Can it be done on a department-by-department basis rather than the entire shop?
A: I suggest doing it twice. Once for the store, you can get a global view of your business and once for each department.