Calculate and Rank ABC

11. ABC Analysis

ABC codes are used to rank and prioritize items.  The Pareto principle as it applies to sales suggests that 20% of products result in 80% of sales.  To extend that to the activities of a forecaster or planner means that concentrating on 20% of products should result in the effective management of 80% of sales. The role of ABC analysis is to identify that 20% so that they can be easily be set apart from the remaining products for closer scrutiny.  In this way, items which are most “important”can be easily identified.

Avercast provides for stratification of products into 4 groups identified as A, B, C and D. Items can be ranked based on unit volume, cost, price, profit (calculated as price minus cost), weight or volume. You can use up to five different stratification schemes.  For example, you might have one ranking of all products across all warehouses and a separate one for products within each individual warehouse.   Or you might wish to have one based on price and a different one based on units.

11.1 Calculate ABC Codes

To calculate ABC codes, open the ABC Parameters window by selecting Calculate ABC Codes, either from the File menu or on the Welcome Screen.  

                             

 ABC codes can be calculated for the entire database or for subsets based on groups of items using the filters in the upper left portion of the ABC Parameters window.  Fields available are:

·        SKU

·        Location

·        Planner

·        Supplier

·        10 Category fields.

For example,if you want to calculate ABC codes separately for SKUs at a single location,you would select that location by entering the code in the Location box, or selecting it from the drop-down list.  If the selected field is defined as a multi-select field, separate analyses foreach value can be performed in one run. For example, if two locations are selected, ABC codes will be calculated for SKUs in each of the locations based on their rankings in the respective locations.

 

Fields can also be grouped so that the ranking is calculated based on the total volume of all items within the grouped field. For example, if only SKU has the group box checked, each SKU will be ranked based on its total volume across all locations. Each SKU will have the same ABC code in all locations based on thatranking, regardless of its volume in any one location. This setting is equivalent to having the“Summarize by SKU” box checked in previous versions of the software. The default is SKU and Location are checked. This will rank all items in the database subject to any other filter settings which might be in place. This setting is equivalent to having the “Summarize by SKU” box unchecked in previous versions.

 

Another example of how the grouping option can be used is to rank your suppliers based on the volume of business you do with each. In this case, check only the Supplier box.  This will create a ranking based on the total volume for each supplier.  In this case,each SKU associated with that supplier will be assigned the same ABC code based on the supplier’s rank.  Note that this is not the same as calculating ABC codes by SKU based on the SKU’s ranking within that supplier; that would be done as described above by selecting one or more values in the Supplier filter box.

 

A Unit of Measure must be selected to be used for theranking.  It is most common to use Cost,Price or Profit as the base for calculating ABC codes since this will measure items’ relative “importance” as it relates to their financial impact on the company.  Care should be taken when using Units because high volume/low value items will place higher in the ranking than those with lower volume but higher value, even if less important.  

Note that a value of “F” in ABC1 will prevent the calculation of planned orders in ASP.

It is possible on the forecasting screen (ABF Sec 3.4) to freeze the ABC codes assigned to an item.  When calculating ABC codes, to avoid changing frozen values, check

It has been the traditional practice to base ABC ranking on purely historicaldata.  But there are times when it would be more appropriate to use forecasts, or some combination of history and forecast to reflect both past performance and future expectations.  Select between 0 and 60 periods for “Period of Sales to Use” and for “Periods of Forecast to Use”.

Select the cutoff percentages for each of the 4 categories (A, B, C,D).  The default settings are 80/15/4/1,but these may be set to any combination which totals 100.  This means that once the ranking is completed,those items starting from the top of the ranking down to the point where 80% of the total volume is reached will be assigned an “A”, the next items down to the 95% level will be “B”, down to 99% will be “C” and the remainder will be “D”.  There are 5 distinct ABC codes assigned to each item.  The total of the 4 cutoff values must always equal 100.  Select which of the 5 codes should be updated in the ABC Code box.

“Use Weekly Summary” should not be checked when usingmonthly forecasting.

Select which Active Codes you wish to have included in the analysis.  Active and Slow Moving arepre-selected by default.

Depending on the overall characteristics of the items in the database, the default cutoff settings may result in an imbalance of items between the 4 categories.  It is recommended that a “trial” be run initially to determine if the number of items in each category is appropriate to your needs. For example, if half of your items are “A” items, you might consider having a smaller group of “most important” items by using a value lower than 80as the cutoff for “A”, and adjust the remaining cutoffs accordingly.  To do this, leave all of the boxes in the Update Options block unchecked.  Once you have decided your final cutoff configuration, then check Update monthly ABC codes.  

When all parameters have been set, click  to execute the calculation (and update, if selected) of the ABC codes.  When the run is completed, the lower portion of the screen will display statistics of theranking.  The total number of items andthe number assigned to each ABC code are shown, as well as the grand total and totals by code for all items in each code (expressed in the same units as selected in the Units of Measure block).

If this is a “trial” run, decide whether the distribution by code is satisfactory.  If not, adjust the cutoff levels and re-run.  To update the ABC codes, check Update monthly ABC codes and click again to update the codes.

11.2  ABC Report

It is possible to generate an Excel spreadsheet report of the results of an ABC calculation.  Note that only the most recent run is stored, so if you are executing multiple ABCcalculations, you must create the report after each run is completed.

To generate an ABC Report select Report Menu from the Reports main menu.  Select ABC Report and clickon Print.  Leave Print Summary from ABCData box checked (default).  You may also apply filters to the report. You will be asked to confirm the name and location of the resulting file, following which the Excel spreadsheet will be created.

The report shows SKU, Location, Description and assigned ABC code for each item listed in their ranking order (high to low) with a ranking number starting from 0.  This rankingnumber is also shown on the forecasting screen as ABC Rank.  For each item, its percentage contribution to the total is shown, along with a cumulative running total percentage.  If your run is a “trial”, this can be used to determine what cutoffs could be used in order to generate an appropriate number of items in each of the code categories.

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