Inventory Category Analysis
Completing an inventory category analysis, whether through ABC or Glenday Sieve methodologies, is a critical step for businesses to better manage their stock, optimise their supply chain, and ensure that resources are allocated efficiently. These methods help organisations categorise their inventory based on various criteria, such as value, demand frequency, or operational importance, allowing for more effective decision-making.
In this post, we'll discuss how to conduct an inventory category analysis, walk through the process for both ABC analysis and the Glenday Sieve method, and highlight the insights and benefits that can be gained from these approaches.
What is Inventory Category Analysis?
Inventory category analysis is the process of segmenting your inventory into different groups based on their importance, sales velocity, or contribution to revenue. This segmentation allows for tailored strategies for inventory management, helping businesses make informed decisions on stocking levels, replenishment schedules, and resource allocation.
The two most common methods for inventory categorisation are:
ABC Analysis: This method ranks inventory items based on their relative value to the business.
Glenday Sieve: This method focuses on identifying the small percentage of items that contribute to the majority of business value or operational focus.
ABC Analysis: A Breakdown
ABC analysis is a simple yet powerful tool that allows businesses to prioritise their efforts on the most critical inventory items. The principle behind it is the Pareto Principle, or the 80/20 rule, where 80% of the effects come from 20% of the causes.
In inventory terms, this means that a small percentage of stock items usually account for the majority of revenue or importance to the business. ABC analysis categorises stock into three groups:
A Items: These are the most important items, representing about 20% of the total items but contributing 80% of the overall business value or revenue.
B Items: These items account for about 30% of the total, contributing to roughly 15% of the business’s value.
C Items: These are the least important items, making up 50% of the stock but contributing only 5% of the total value.
Steps to Perform ABC Analysis
Collect Data: Gather data on the frequency of sales, revenue, or the cost associated with each inventory item over a specific period. This data should cover all SKUs (stock keeping units) in the warehouse.
Calculate the Contribution: For each item, calculate its contribution to total revenue, cost, or another key performance metric.
Sort the Items: Rank the items in descending order based on their contribution, with the highest at the top.
Classify the Items: Assign items to categories:
A: The top 20% that contribute the most value.
B: The next 30% with moderate contribution.
C: The remaining 50%, which offer the least contribution but still need management.
Tailor Inventory Management: Once categorised, you can adjust inventory strategies based on the class of the item. ‘A’ items require tighter controls, frequent reviews, and higher safety stock levels, while ‘C’ items may need less attention and investment.
Benefits of ABC Analysis
Focus on High-Impact Items: ABC analysis helps businesses focus on the items that have the greatest impact on revenue or operational success. Resources are concentrated where they’ll deliver the most value.
Improved Cash Flow: By managing ‘A’ items more effectively, businesses can reduce stockouts and overstocking, leading to better cash flow and fewer holding costs.
Optimised Replenishment Strategies: ABC categorisation allows for differentiated stocking and replenishment policies, such as more frequent ordering for ‘A’ items and less frequent ordering for ‘C’ items, improving overall efficiency.
Glenday Sieve Method: A Deeper Dive
The Glenday Sieve method, while less common than ABC analysis, is another excellent approach to inventory categorisation. This method takes a more operational view by focusing on the small percentage of activities or items that drive the majority of outcomes in the business.
The Glenday Sieve method segments inventory into four colour-coded categories:
Green: The top 6% of items that contribute to 50% of revenue or operational value.
Yellow: The next 20% of items that contribute the following 35% of value.
Blue: The next 50% of items that contribute the next 10% of value.
Red: The remaining 24% of items that contribute only 5% of the total value.
Steps to Perform a Glenday Sieve Analysis
Collect Data: Similar to ABC analysis, start by gathering sales data, order frequency, and operational impact metrics for each item over a specific period.
Rank by Contribution: Rank the items in descending order of their contribution to the business's operational efficiency or value, focusing on key operational outcomes, such as revenue or production speed.
Categorise the Items: Assign items to the four Glenday Sieve categories based on their contribution percentages:
Green: The critical few items that contribute the majority of the operational value.
Yellow: Important items that also have significant contributions.
Blue: Lesser, but still necessary items.
Red: Items that offer minimal contribution and are prime candidates for review or elimination.
Create Action Plans: Once items are classified, tailor specific management strategies for each category. For example, green items may warrant additional investment or operational focus, while red items might be phased out or streamlined.
Benefits of Glenday Sieve
Operational Focus: The Glenday Sieve method gives businesses clear insight into the small percentage of items that drive operational success, allowing them to concentrate efforts where it matters most.
Cost Efficiency: By focusing on the high-value "green" and "yellow" items, businesses can optimise their operations, reduce unnecessary complexity, and cut costs associated with managing less impactful inventory.
Improved Decision-Making: The visual nature of the Glenday Sieve categories (green, yellow, blue, and red) offers clear, actionable insights into where to focus efforts for inventory reduction, replenishment strategies, and operational improvements.
When to Use ABC Analysis vs Glenday Sieve
ABC Analysis: Best suited for businesses that want to prioritise inventory based on financial contributions, such as revenue or gross margin. It’s particularly useful for companies with high SKU counts or a wide variety of product lines.
Glenday Sieve: More suited for businesses looking for operational clarity and efficiency. This method works well in environments where a small percentage of items are responsible for the majority of value-added work, such as in manufacturing or process-heavy industries.
Key Insights and Benefits from Inventory Category Analysis
Improved Forecasting and Planning: By understanding which items are most important, you can better align demand forecasts and production plans with actual business needs.
Optimised Inventory Levels: Both ABC and Glenday Sieve allow businesses to reduce unnecessary stock levels, lowering holding costs while improving turnover rates for key items.
Targeted Process Improvement: With category analysis, it’s easier to identify which products or categories deserve more attention and resources, helping to streamline operational improvements and reduce inefficiencies.
Informed Decision-Making: Inventory category analysis provides a data-driven foundation for making strategic decisions about inventory investment, procurement, and warehouse management.
Conclusion
Inventory category analysis is a critical process that should be a regular part of any business's inventory management strategy. Whether using ABC analysis to prioritise based on value or the Glenday Sieve method for operational focus, these tools offer powerful insights that can help businesses optimise stock levels, improve cash flow, and streamline their operations.
By regularly performing inventory category analysis, businesses gain visibility into where their resources are most effective, allowing for more informed and strategic decision-making. Ultimately, this leads to a more agile, efficient, and profitable supply chain.
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