ABC Inventory Classification

The ABC method of inventory classification allows you to organize the distribution of the different goods within the warehouse based on their impact on revenue, its value, and its rotation. This is an important concept in warehouse management.

This system prioritizes the acquisition and placement of products not because of their volume or quantity, but because of the economic contribution they make to the company.

The ABC system is based on the Pareto principle or 80/20 rule, which indicates that 20% of the effort is responsible for 80% of the results. If we apply it to the warehouse ecosystem, 20% of the items generate 80% of the goods movements, while 80% of the products originate the remaining 20% of movements.

Inventory classification levels using the ABC method

References are classified into three levels:

Items with Class A

Quantity-wise, they usually occupy 20% of inventories, but they are the ones that experience the most rotation and therefore have strategic importance. Class A generally includes the products in which the company has invested the most budget and generates 80% of the revenue, so it is a priority to avoid stock outages.

Also belonging to this group are SKUs that, by their characteristics, are critical to the proper functioning of the company. In any case, it is advisable to maintain a thorough stock control of references classified as A with frequent, or even permanent, inventories.

When locating class A products in the warehouse, they tend to be located in low areas, with easy direct access for the operator.

Items with Class B

These comprise the average rotation strip and typically account for 30% of inventories in quantity. These items are renewed with less speed, so their value and relevance are lower compared to Class A products.

In this case, attention should be paid to the way SKUs are classified as Class B in case they can make the leap to Class A easily or, likewise, become C products. The procurement of such stocks can work with the minimum/maximum stock rule, rather than being subject to thorough control over purchases and issuing orders on an ongoing period of time (as may be the case with A’s).

In the warehouse, they are best located in intermediate height areas whose access is not as direct as in the positions occupied by the products in Class A.

Items with Class C

As a whole, C products are the most numerous, making up 50% of the stored references. However, they are also the least used by customers.

As they are not strategically important items, the resources devoted to controlling these references may be more modest and replenishment is usually adjusted with safety stocks. In any case, it is advisable to monitor them so that they do not end up forming an obsolete inventory or undergo null rotation.

The primary question with C products is, should part of the budget be invested in keeping stock of these references?

In the storage facility, as needed to be accessed sporadically, they occupy the highest or least accessible areas, as well as the areas farthest from the exit docks.

How to perform product classification with the ABC system?

There is no single convention for classifying products into classes A, B, and C. Each company determines this based on its specific way of operating and the characteristics of demand and products. If we look at the theory, there are three main methods for calculating stock turnover in inventory:

ABC classification by unit cost:

Goods are sorted depending on the level of inventory investment that is intended for each of them, i.e. at a higher cost of the goods, the greater attention is paid to the management of the procurement. This approach is useful when you store products of very different value (not so much when your prices are similar).

Classification by total value in inventory:

The difference from the previous one is that this system takes into account the units that are stored in stock of each class at the time the calculation is performed.

Using this method, it is common for items to be left within the boundaries between categories when sorting them and it is more complex to determine the class to which they belong. In addition, the classification changes continuously and this requires that it need to be recalculated weekly or monthly to prevent the system from being out of date.

ABC rating by use and value:

This is the most common method when organizing the warehouse. It considers as the basis of the calculation the demand for the goods and the value thereof. This method goes a step further than the previous ones: even though a product is relevant to inventory because of its high value, if it is not sold frequently, it will not take up the space dedicated to class A products in the storage facility.

In this sense, it should be noted that, in order for the ABC method to be more effective, the demand for a product is not the only metric that we must contemplate. Other considerations such as the profit margin of each product or the impact of stock breaks should not be overlooked.

Applying the ABC method to warehouse organization

The ABC method is one of the pillars on which the warehouse layout sits.

How can the warehouse manager take advantage of this inventory classification for the organization of goods in the warehouse?

Adjust storage systems to each reference class to take advantage of space

It should be based on the idea that classification according to the ABC method is one more parameter to take into account in location management and should be combined with other important characteristics of the products such as their level of danger, the temperature at which they should be stored, the volume and size…

Ask yourself, how then do the ABC method and storage systems relate? It is advisable to equip the warehouse with different types of shelves in order to adjust to the movement of each product group and, in addition, optimize the available storage space. Standardizing load units in pallets or boxes help make warehouse location management more flexible by enabling storage bin reorganization.

For example, a common practice is to place class A products on compact shelves near the output docks or picking area, as there will be more pallets per reference in continuous movement. On the other hand, goods with less rotation will be placed on pallet shelves, which ensures direct access to the product when necessary.

Streamline transport between different areas with automatic systems

The ABC method is useful for classifying inventory based on its value and stock turnover. However, when most of the catalog in stock must be shipped in very tight timeframes, for example in e-Commerce logistics, it is essential to provide the installation with the agility necessary to prepare orders on time. For example, automatic transport systems such as roller conveyors allow accelerating the movement of goods by limiting the number of maneuvers in the picking process and saving time spent on travel.

A final note…

Warehouse management systems can help the user make the most of the classification of goods using the ABC method. This software enables:

• Maximizing storage space
• Organize picking activities according to priorities
• Accurate tracking of item movements for process improvement analytics

Classification of references according to the ABC method saves time and effort in operations linked to storage logistics.