(Always Better Control)

ABC Analysis - KPIs to Consider for

Effective Inventory Management

Part 1

A Always B Better C Control

80 % Share 15 % Share 5 % Share
20 % Position 30 % Position 50 % Position

A B B C C C

B C C
C

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To understand what KPI’s are critical to the organizational mission, it is considered a best practice to
develop a ‘Business Requirements Checklist’. In developing the checklist, the requirements-gathering
process must encompass the full range of requirements that may affect the project.

From a SKU classification perspective such as A-B-C, this would most likely involve:

Strategic Part- Logistics

Financial Quality Service Level Warranty & consider-
nership
Performance Standards Standards Maintenance ations-Import/-
Requirements
Export, etc.

How do you gather such information?

You create questionnaires (approximately 20 ques- 2. Survey technology today will enable you, once
tions) and distribute them via survey methodology you have identified who should receive the survey
to your internal functional stakeholders in sales, request and have obtained senior management
marketing, procurement, logistics, finance, engi- approval and agreement for sponsorship, to create
neering, and operations one survey but ensure that the correct function
answers only those questions that they should ad-
dress.

This way, you can analyze the data by stakeholder function and develop KPI’s that will have the most
impact to measure variance from a standard and enable corrective actions to be initiated with the
suppliers or internally, as indicated by the KPI data.

Finance Based Metrics

Inventory Turnover KPI’s Product Life Cycle KPI’s

Cost Optimization KPI’s Product Rationalization

KPI’s

Sales Performance KPI’s Risk Management KPI’s

Profitability KPI’s Demand Volatility KPI’s

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Procurement Based Sales & Marketing Based
Metrics Metrics

Inventory Turnover KPI’s Sales Performance KPI’s

Sales Performance KPI’s Profitability KPI’s

Profitability KPI’s Product Life Cycle KPI’s

Product Rationalization
Product Life Cycle KPI’s
KPI’s

Product Rationalization
Demand Volatility KPI’s
KPI’s

Demand Volatility KPI’s Seasonality Analysis KPI’s

Stockout and Backorder Customer Segmentation

KPI’s KPI’s

Order Processing
Order Fulfillment KPI’s
Efficiency KPI’s

Supplier Performance
KPI’s Supply Management/Logistics
Based Metrics
SKU Rationalization KPI’s

Demand Volatility KPI’s

Risk Management KPI’s

Stockout and Backorder

Demand Planning KPI’s KPI’s

Order Fulfillment KPI’s

Cost Optimization KPI’s

Lead Time Management SKU Rationalization KPI’s

KPI’s
Risk Management KPI’s
Seasonality Analysis KPI’s
Lead Time Management
Supplier Segmentation KPI’s
KPI’s
Seasonality Analysis
Order Processing KPI’s
Efficiency KPI’s
Space Utilization KPIs

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ABC Classification

“C” SKUs should represent roughly

5%
of the cost of goods
sold for a particular
SKU commodity class

“A” SKUs should represent roughly

80%
of the cost of goods
“B” SKUs should represent roughly

15%
sold for a particular
of the cost of SKU commodity
goods sold for SKU class
commodity class

5%

15%

80%

Example:

Printer ink: commodity class in total USD 100K. ‘A’ items would represent 80% of the cost of goods sold on
whole SKU’s, which may equate to 20% of the actual SKU’s; ‘B’ items would represent 15% of cost of goods
sold on total SKU’s, this may equate to 30% of the actual SKU’s; ‘C’ items would represent 5% of cost of
goods sold on total SKU’s, this may equate to 50% of the actual SKU’s.

Your KPI formulas will need to be designed by commodity class and focused on the actual SKU move-
ments, inbound and outbound, with the change trigger notification initiated by the movement from the A
to B to C parameters established by historical trend analysis and driven by marketplace macro and micro
changes such as equipment model changes, new entries into the marketplace, etc.

Many companies do not inventory ‘C” category SKU’s. They order them on demand. If they do inventory
them, they keep 1 or 2 individual items per SKU according to what demand indicates. Time to deliver will
be the determining factor.

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1. Inventory Turnover KPIs

Average inventory turnover

Inventory Turnover KPI’s: ratio for A, B, and C categories:
The standard KPI formula for this metric will Calculates the average number of times inventory is
be used by your CPO and finance will use the sold and replaced within a specific time, providing
standard KPI formula for this metric to track insights into inventory liquidity for each
inventory performance based on currency category.
and percentage variance to budget.
(Average inventory turnover as a financial metric

A B
should be based on total inventory and not
complicated by the ABC designations. This is
because A&B categories are
usually the in-stock options. As a best practice,
C and D are on-demand in and out within the
same period due to the less frequent demand.)

Days of inventory on
hand for each category: D C Percentage change in
inventory turnover for
each category:
Determines the average number of days
it takes to sell the inventory, indicating Measures the percentage increase or decrease
how quickly inventory is depleted for in inventory turnover compared to a previous
each category. period, indicating the change in efficiency
.
(Percent increase or decrease as listed in this paragraph, the percentage
increase or decrease should focus on the A&B categories primarily. If a
company is looking at 'C' items, then they should only have a very small
inventory on hand (1 or 2 items), so tracking % increase would not add
any value. )

(Note- All inventory turnover KPI's are financial KPI's and need to be tracked monthly by category to ensure inventory classifi-
cations are accurate. It will help maintain the appropriate 80-20 designation of Pareto.)

2. Sales Performance KPIs

Total sales revenue for Percentage contribution of

A, B, and C categories each category to overall sales
Calculates the percentage of total sales revenue
Measures the total revenue generated by
contributed by each category, highlighting their
products within each category.
relative importance.

(Note- While all these metrics are important, the

A B
relative importance of A items vs B items vs C items
needs to be understood. C items are a convenience
while A items should be driving the most revenue
and the best margin. B items will land in the
middle somewhere.)

C Year-over-year growth
rate in sales for each
category
Measures the percentage change in sales
revenue for each category compared to the
same period in the previous year, indicating
their growth or decline.

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Stay tuned Part 2 coming soon

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