Inventory Classification Basics - Supply Chain Optimization

Classifying your inventory is as easy as A, B, C.

ABC
As easy as.. Getty Images

Inventory Control.  Knowing what you have, available to ship to your customers or go into production is at the very core of supply chain optimization

One of the simplest and most effective tools in keeping track of what you have is to follow these simple rules of inventory classification. 

In companies with thousands of SKU’s to keep track of, or in companies with limited inventory control resources, it’s impossible to count every SKU, so an A-B-C analysis is used to help assign a tier structure to inventory value.

  So that you know which parts you need to keep track of all the time and which ones you can reconcile once a year. 

ABC Inventory Classification

There are multiple ways to approach you’re A-B-C inventory classification, but for most companies:

  • A inventory accounts for about 20 percent of the items in the warehouse and 80 percent of the dollar usage.
  • B inventory accounts for about 30 percent of the items and 15 percent of the dollar usage.
  • C inventory accounts for about 50 percent of the items and 5 percent of the dollar usage.

Some companies use other criteria, like unit cost, supplier lead time, customer importance, and expiration dating to create their A-B-C tier structure. 

And some companies blend more than one criteria.  You should be able to export the SKU data you need from your MRP or WMS into Excel and do a simple sort to get your A-B-C classification started. 

Remember, your inventory accuracy objective should be 100% and if you’re not consistently at greater than 99%, you need to put your desk in the middle of the warehouse until you are.

  To review what I said here….

100% Inventory Accuracy

Okay, let’s assume you agree that you need to have 100% inventory accuracy.  How do you measure what your inventory accuracy is right now?  You need to start by counting 100% of your inventory – whether that’s 50 SKU’s of 15,000 SKU’s. 

You might think that this sounds like a painful process and if your company’s not done it (or done it well) before – it is.

 But like they say in tattooing, you’re not going to get your desired result without some pain.

There are two ways to count your inventory – to assess your accuracy. 

  1. Floor-to-sheet.  Count everything you have in inventory, then compare that to what your system thinks you have.
  2. Sheet-to-floor.  Take the data from your system out into the warehouse and compare it to what you find. 

Floor-to-sheet is the scarier way to go and forces you to be more diligent in your counting.  I recommend starting with a floor-to-sheet count and reconciling it against a sheet-to-floor count. 

Once you complete your physical inventory, you now have a starting point.  Some companies don’t count their inventory again until their next physical inventory – sometimes a year later.  I do not recommend this approach.

Cycle Counting

Cycle counting helps maintain inventory accuracy throughout the year and can be handled a couple different ways.  How you handle cycle counting will depend on your number SKU’s, the value of your inventory and whether or not you have the resources to commit to inventory accuracy. 

If your company has 1200 SKU’s to manage, you could choose to cycle count 100 each month, which means counting approximately 5 SKU’s each business day.

  One or two people can generally do that on a part-time basis. 

This approach allows you to count every one of your SKU’s during the year.  If managed and controlled correctly, this method of cycle counting will help next year’s physical inventory go smoothly.  Some companies that employ this cycle counting methodology do it instead of an annual inventory.  I recommend doing both. 

If you have more SKU’s that you can count during a year of normal cycle counting or if you don’t have the people to commit counting everything, you can choose to cycle count only your high value SKU’s. 

Usually 20% of a company’s inventory accounts for 80% of its total inventory value.  (This 20% is sometimes called your “A” inventory.)  If you can’t cycle count 100% of your SKU’s during the year, consider cycle counting your “A” inventory.

 

You’ll still be ahead of the game when it comes time for next year’s physical inventory.

Some key points when considering cycle counting: 

Count the SKU’s randomly.  Most MRP or WMS systems (I know the S in WMS stands for “system”) have a cycle count module that provides random SKU’s on a daily basis.  A random count helps prevent your warehouse folks from manipulating the SKU’s that are going to be counted. 

Keep segregation of duties in mind.  Your cycle counters shouldn’t be the same folks who handle your inventory every day.  This helps keep the process and the data clean. 

So, yes, to the question of cycle count or physical inventory – the answer is both.  And by following the steps above, you can do that with negligible impact to your day-to-day operations. 

Indeed, following the steps above will improve your day-to-day operations and get you on your way to optimizing your supply chain.