Data Files > Inventory Information > ABC Classification

ABC Classification

Related Topics

Assigning classifications to items allows you to identify high and low performance items and determine item ranking in contributing to profits from sales. This data is useful in developing marketing and pricing strategies as well as projecting future purchases.

The following screens work together to calculate and create item classifications.

Screen

Function

ABC Maintenance

Percentage settings used to divide ranked items into classification groupings for each category. Percentages for each class within each category must be set on the ABC Maintenance screen prior to using the ABC Classification screen.

ABC Classification

Selection criteria for gathering the usage data, commands for running the classification program, and the function for updating the item records.

If you run the ABC Classification program and there are no percentage parameters defined for the category you select, no classifications can be applied to the item records.

The system ranks and classifies items based on extended cost usage for a specified number of months, from 1 month to 60 months. Extended cost usage is determined from item activity for a specified timeframe, using the item cost multiplied by the item sales quantities. The ABC classification function includes only items with an extended cost usage other than zero and a history start date prior to the selected timeframe. The history start date on an item record defaults from the date of the first activity record for the item.

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When defining new items, DMSi recommends you manually assign an overall ABC classification on the item record, to be used until the item is picked up by the ABC classification function. Refer to the Item Records heading for details about assigning ABC classifications to new item records.

When defining ABC classifications, you must first specify the context for ranking, for example by product group or buyer. Within each context, you can rank items into various classes such as A through D. After calculating rankings and assigning ABC classifications to item records, you can review the class, ranking and population using the More command on the Item Maintenance or Stock Status screen.

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When using ABC classifications for inventory control, recalculate and assign new classifications every 6 12 months.

Following is the general process flow for defining and using ABC classes.

1.

Define the class and percentages within each category on ABC Maintenance.

2.

On ABC Classification, select item sales history time period and categories for calculating class values.

3.

Click Calculate/Update ABC's.

4.

On Item Maintenance, review classifications by selecting More for the Overall ABC field.

Set up percentages on the ABC Maintenance screen for each class in each category/context that you plan to use for classification. The percentages determine how the system divides the ranked items among the four class codes. The total of the percentages assigned a category/context should equal 100%. You can adjust the percentages at anytime to generate classifications according to your specifications. Following are some guidelines for initial percentages relative to All Items.

Class

Guidelines

A

A few key items that account for a large percentage of your sales amounts

Should get your highest effort for selling and keeping stock

Price competitively

Suggested initial classification: 70%

B

Second priority but should still receive high attention for selling and keeping in stock

Price for strong margin

Suggested initial classification: 20%

C

Require minimal attention

May apply to many items, although a small percentage of sales amount

Needed to support your higher selling class A items: You may need to carry the C items so your customers do not go elsewhere for the A items.

For example, you are a roofing distributor and your shingles are class A items. Supporting C items include roofing nails, felt, or tools required for the job.

Price to generate a full margin

Suggested initial classification: 7%

D

Do not require any extra attention

Possible candidates for elimination or non-stock

Price aggressively if supporting sale of class A or B items

Suggested initial classification: 3%

Key Functions

J:\Learning Systems\Agility Help\Data_Files\Bitmaps\path_icon.gif Access ABC Maintenance: Data Files Item Information Misc. Settings ABC Classification Click Parameters

Notes:

Your security access determines which branches are available.

The percentages for the classes should always start with the highest percentage for A, with descending percentages to each class keeping the classes in order from A to D.

J:\Learning Systems\Agility Help\Data_Files\Bitmaps\path_icon.gif Access ABC Maintenance: Data Files Item Information Misc. Settings ABC Classification

Notes:

Your security access determines which branches are available.

Processing Rules

ABC classification assists you in controlling your inventory more easily.

The system ranks all items. You cannot select specific items or a range of items within a context.

The system stores the item classification on the item record. Use the Item Maintenance screen to view or update the item classification for a specific item.

An item must have history equal to or greater than the number of months you specify for the calculation to be included in the classification. If the item has less history than the number of months you specify or if the start date is blank on the item record, the system excludes the item from the classification process.

The system reads only item activity records for the categories selected (i.e. All, Supplier, Product Group or Buyer) that meet the number of months setting and have one of the following activity types.

SO sales order

RM-INPUT reman input processing

CM credit memo

WO work order

If an item is a parent, the system does not include the WO activity type for that item.

SM-SALES summary of item activity for sales orders and credit memos

SM-PROD summary of item activity for work orders and reman input records

USAGE-ADJ usage history adjustments

Refer to the 24 Month Usage heading for information about usage history.

The system creates summarized item activity records when detail records are purged from the system.

Sundry items are not included in ABC calculations.

In addition you must have historical item activity for the time period you want to use when classifying the items.

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Updating the item classification can require substantial processing time and is best run during off-peak hours. When you update item classifications, the system assigns the classes to the item record. You can manually enter or change the overall class on the Item Maintenance screen. When you run item classification and update item records, the system replaces the class on the item record with the newly calculated classification.

The following processing rules apply to ABC calculations.

When calculating the extended cost usage for average cost items, the system uses activity cost on the item activity record to calculate extended usage.

For market cost items, the system uses average cost to calculate extended usage. If the average cost is zero for a market cost item, the system uses the activity cost on the item activity record.

If the cost designation on the item activity record is blank, the system uses the cost designation from the item record.

The system divides the item cost by the cost UOM so the extended cost usage for each applicable line of activity reflects the same unit of measure.

Following is the formula for calculating the extended cost usage for a line item of activity.

Extended cost usage = item activity qty * (item cost / cost UOM)

The system adds the extended cost usage of each activity line to determine the total extended cost usage for the item during the specified timeframe. The system excludes items with an extended cost usage of zero from ABC classification.

Example of cost usage calculation for Item 008

Activity Quantity

Cost

Extended Cost Usage

6

10.00

60.00

3

11.00

33.00

10

100.00

100.00

Total extended cost usage

193.00

After calculating the extended cost usage, the system determines the item ranking compared to other items selected for classification. The system ranks the items high to low, with "1" indicating the item with the highest extended cost usage. When calculating the item ranking within a category such as product group, the system compares each item's extended cost usage to the extended cost usage of all other items within the same product group to determine the item's ranking for that product group.

Example of Ranking of Items

Rank

Item Number

Extended Cost Usage

1

Item 016

302.00

2

Item 002

251.00

3

Item 005

245.00

4

Item 008

193.00

5

Item 010

150.00

6

Item 049

45.00

7

Item 018

21.00

8

Item 011

20.00

9

Item 023

15.00

10

Item 015

12.00

Total cost usage for item activity during time period

1254.00

The sample item 008 is ranked fourth out of ten items based on the extended cost usage. Then, starting with the lowest ranked item, the system classifies items based on the percentage of population assigned each classification (D, C, B and A). The system uses the class with the lowest percentage and assigns that class code to the lowest ranking items.

Continuing our example, we use the recommended percentages of A 70%, B 20%, C 7%, and D 3% to determine the threshold for each class. To determine the classification, the system starts at the bottom of the ranked items and adds up the extended cost usage with the next ranked item until the amount meets or exceeds the calculated threshold amount.

Class

Calculations

D

1254 * 3% = 37.62 extended cost usage threshold

Item ranked 10 12.00
Item ranked 9 15.00
Item ranked 8 20.00
Total 47.00 meets and exceeds the 37.62 threshold for Class D

The system assigns Class D to the items ranked 8, 9, and 10 upon update.

C

1254 * 7% = 87.78 extended cost usage threshold

Item ranked 7 21.00
Item ranked 6 45.00
Item ranked 5 150.00
Total 216.00 meets and exceeds the 87.78 threshold for Class C

The system assigns Class C to the items ranked 5, 6, and 7 upon update.

B

1254 * 20% = 250.80 extended cost usage threshold

Item ranked 4 193.00
Item ranked 3 245.00
Total 438.00 meets and exceeds the 250.80 threshold for Class B

The system assigns Class B to the items ranked 3 and 4 upon update.

A

The system assigns Class A to the remaining items. Since the system works from the bottom up, the total cost usage for items in Class A may not meet the calculated extended cost usage threshold.

1254 * 70% = 877.80 extended cost usage threshold

Item ranked 2 251.00
Item ranked 1 302.00
Total 553.00

The system assigns Class A to the items ranked 1 and 2 upon update.

In this example when you click Update on the ABC Classification screen, item 008 is assigned Class B. If you were to review the classification for item 008 using the More command on the Item Maintenance screen, the columns for Overall would contain the following information.

Class

Rank

Population

Key

B

4

10

Blank

For the classifications for supplier, product group and buyer, the Key field identifies the context of the classifications such as the primary supplier code, product group code or buyer code.

If you classify items using more than one category, the ABC classification for each category may be different. The item may receive an A classification for product group but a B classification when compared to all inventory items.

See Also

Branch Groups


Distribution Management Systems, Inc.
17002 Marcy Street
Omaha, NE 68118