ABC Analysis for Inventory Optimization: Step-by-Step Guide
Understanding ABC Analysis
ABC analysis is a popular inventory categorization technique that helps businesses prioritize their inventory items based on their importance and consumption patterns. It classifies items into three categories: A, B, and C, with A items being the most critical and C items being the least.
Steps for Setting Up ABC Analysis in Excel
1. Prepare Data
Create a spreadsheet with the following columns: Item, Unit Cost, Annual Demand, and Total Value (Unit Cost x Annual Demand).
2. Calculate Total Value
For each item, multiply the unit cost by the annual demand to determine the total value.
3. Calculate Cumulative Percentage
Calculate the cumulative percentage of total value for each item by dividing its total value by the total value of all items and multiplying by 100.
4. Set Up ABC Analysis Codes
Create a new column for ABC Analysis Codes and assign the following codes based on the cumulative percentage:
- A: 0% - 80%
- B: 80% - 95%
- C: 95% - 100%
5. Insert Formula
In the ABC Analysis Codes column, insert the following formula for each item:
=IF(Cumulative_Percentage<=80%, "A", IF(Cumulative_Percentage<=95%, "B", "C"))
Benefits of ABC Analysis
ABC analysis offers several benefits for businesses, including:
- Improved inventory control
- Reduced storage costs
- Enhanced customer service
- Increased profitability
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