ABC analysis supports warehouse logistics and materials management

In ABC analysis, warehoused goods are grouped by quantity, relevance, value and turnover to ensure optimal distribution in the warehouse and effective prioritisation of items. This method is based on the Pareto principle (80/20 rule), i.e. 20 percent of the effort goes toward doing 80 percent of the work, while 80 percent of the effort is needed to complete the last 20 percent. In warehousing terms, 20 percent of the goods generate 80 percent of the sales or movements, while the remaining 80 percent account for 20 percent of sales.

In ABC analysis, goods are placed into A, B and C classes in descending order using previously defined KPIs. Logistics professionals know to pay more attention to class A items because they generate more revenue than class C items. They also know that class A goods are moved more frequently than class C goods. This method can be applied not only to goods, but also to suppliers, employees, customers, quality, resources and projects.

Classification through ABC analysis

Class A contains the most important items that are high-value but low-volume. Class B consists of less important items that are moderate-value and moderate-volume. Class C comprises low-value, high-volume items.
Suppliers and customers are prioritised based on purchase and sales volumes.

  • Class A: 80% of total value / 15% of items stored
  • Class B: 15% of total value / 35% of items stored
  • Class C: 5% of total value / 50% of items stored

The classes help logistics professionals classify your products, suppliers or customers. However, the class boundaries are not fixed. Some companies may use more than three categories.

Application of ABC analysis in logistics

ABC analysis is used very frequently in logistics because it can be easily calculated in Excel or with software tools. It distills complex relationships to the essentials, puts priorities on solid base of data and allows results to be visualised. However, the classes can only be a rough division since they depend on the percentage distribution and the number of classes. ABC analysis requires data that is extensive and, most importantly, complete. Otherwise, it could very well overlook important factors.

Combination of ABC and XYZ analysis

If you want to add the time factor to an ABC analysis, you can combine it with an XYZ analysis. An XYZ analysis looks at fluctuations in goods consumption. Both analyses are performed separately; the results are combined in a matrix at the end. Various options are indicated by the different combinations of classes. Low-fluctuation items that are high- or medium-value are good choices for just-in-time delivery, for example. In contrast, high-value goods that fluctuate widely and unpredictably are generally ordered as needed instead of being kept in stock in significant volumes.

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