ABC analysis is a selection management technique that can help improve the management of inventory. It offers a complete understanding of the most valuable and least valuable products that are essential to ensure a balanced balance between list and sales. It provides a quick overview of the strengths and challenges. The analysis is built in an analysis based on the Pareto technique of analysis.
In India, the retail fashion industry has been among the major contributing factors to the country’s development. It is comprised of various departments, such as styling, designing manufacturing, retailing, supply chain, advertising, and promotion, among others.
Sales Analysis
Since the fashion industry is flourishing, however, competition rates are extremely high, particularly when there is a comparable market to the one you are targeting. The fashion industry is based on designers and requires an understanding of business intelligence. Sales analysis is a crucial KPI (key performance indicator) to ensure the success of a fashion company. Other important KPIs that must be considered include regional sales as well as average value of orders, sell-through rates, and growth in sales as well as revenue. Forecasting demand so that you keep a healthy inventory and decreasing the deadstock percentage is vital. It can lead to significant growth and will help identify opportunities to grow the company. It also assists in understanding the customer better and provides services that cater to a particular need.
There are myriad ways of conducting sales analysis, and ABC analysis is just one of them. ABC analysis is a method of selection management technique that can help improve the management of inventory. It offers a complete understanding of the best and least valued items and is crucial to keeping a healthy equilibrium between list and sales. It provides a quick overview of the strengths and challenges. The analysis is founded on using the Pareto approach to analysis. In a business that is primarily focused on products, it is vital to identify the types of products that bring in the most revenue and sales to manage inventory properly. In doing this, customer satisfaction is a key factor in the creation and eventual expansion of the business. According to research that shows that if just 1 percent of customers leave the store unhappy, that will give some advantage over the rival brand. Thus, it would be best if you met the demands of customers to run a profitable company without having to waste capital on surplus stock.
ABC Analysis
ABC analysis is among the most popular analysis methods and is built on the Pareto principle that French creator Vilfredo Pareto created. In a paper released in January 1951, a writer explained the way General Electric was the first company to utilize ABC analysis to improve the efficiency of inventory (Dickie 1951). This is a method employed to make business decisions by studying the past data. It is founded on the principle of 80-20. Pareto analysis is based upon the notion that 80 percent of revenue is accomplished by completing 20% of the work. Alternatively, 80 percent of the problems can be identified as 20 percent of the root cause (Karuppusami and Gandhinathan).
In this report, products are categorized into three classes based on the demand and sales grades A, B, and.
Grade A The most popular products demanded fall into this category. They are, in essence, profitable products that contribute about 80 percent of total retail revenues. This is why these products must always be treated as an absolute priority.
Grade B The products make up approximately 15 percent of the total revenue. This is typically the biggest inventory that an organization maintains. These items are essential to have on the list. However, they are lower than grade-A goods. The list of such things will fluctuate between grade A and grade C products in accordance with demand and sales.
Class C The products are substantially less, about 5 percent of the revenues. They do not add much value to businesses and increase the Cost of storage within the facility. They can also be referred to as slow-moving stocks or deadstock. Strategies must be implemented to reduce the supply of grades C and lower storage costs.
Calculating ABC Analysis
The total amount of revenue calculates the percentage of sales for the category from a particular product during one specific time frame subtracted from the overall sales in the same time frame. For example, suppose the store sold black dresses for Rs1,00,000. One month, the total sales generated by the store in the same period is Rs3,00,000. The contribution of the small black dresses would be about 33 percent of the total revenue. The same procedure is applicable to each category in order to get an accurate picture of the grade A inventory as well as the dead inventory.
Advantages of ABC Analysis
Since it is the most commonly used approach, ABC analysis has many advantages, including the following:
Optimizing inventory and forecast of demand This analysis will help to identify the most popular products that are in high order. This will allow you to remove the dead stock and boost the demand forecast’s effectiveness.
Maintain the lifecycle of the product. A product is comprised of four primary phases in the lifecycle of a product (PLC): introduction, growth, maturation, and decline. This analysis assists in maintaining the correct cycle of life for the development and also to monitor in real-time the condition of inventory.
Control over inventory that is high-cost In the event that the items are expensive and fall into category C, then they could be easily identified using this analysis. They can then be further sold or at a discount to create more space for grade A and B items.
Increase sell-through rate (STR): The sell-through rate refers to the percentage at which products in the category are sold. It is calculated according to the inventory at the start of each month. A STR of 80% is considered to be a great price for a retail store. On average, it is anything between 40 and 80 percent.
Reduce costs for storage Storage costs in warehouses are extremely high, and this analysis provides clear information about the slow-moving products or deadstock that can be disposed of or moved by discount sales and sales, which will create more room for the items of grades A and B.
Higher price for the product Best-selling product prices can be increased by increasing demand to increase profits.
Better negotiations with suppliers: The Cost of products that aren’t selling well could be better negotiated in conjunction with suppliers. The suppliers of items that sell quickly could be arranged to provide post-purchase assistance.
Improve the turnover rate of stock Controlling inventory is a way to lower the Cost of handling, transport cost, and the time of product in the store, thus improving the turnover rate. This aids in the proper management of categories and more efficient customer service.
Limitations of ABC Analysis
Time loss and dissatisfaction of customers: ABC analysis can only be used after the product is sold. At the beginning of the new season, without the availability of data on sales and demand, the product is assigned to different categories according to the retailer’s experience. This causes an inability to spend time reviewing the situation and could cause customers to be dissatisfied.
New product challenges: Because ABC analysis relies upon historical data, It is not applicable to seasonal or new products. Since new products do not have a sales track record, ABC analysis cannot help to predict their performance or inventory levels. It is not a tool for business-related decision-making.
Not suitable for all items. Functional clothing items might be in lower demand in comparison to fashion or novelty products. Therefore, ABC analysis will grade them in the category of C. But this item might be useful.
Mismanagement of inventory: ABC analysis is determined by price or sale frequency, not volume. This could result in inventory mismanagement, and the shop could be severely deficient in the B and C grades of items. It might contain a large quantity of quality A stock with no regular monitoring. This could result in dissatisfied customers as well as a stock accumulation that is high in value.
Involvement in theft and losses The ABC analysis focuses on products of grade A, Grade B, and C that could be overlooked, resulting in destruction, product obsolescence, loss, or theft.