Answered: Explain ABC analysis with an example of…

Principles Of Marketing

17th Edition

ISBN:9780134492513

Author:Kotler, Philip, Armstrong, Gary (gary M.)

Publisher:Kotler, Philip, Armstrong, Gary (gary M.)

Chapter1: Marketing: Creating Customer Value And Engagement

Section: Chapter Questions

Problem 1.1DQ

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· The smallest category, A, is always allocated for the greatest earners. It stands for your most precious, highest-quality clients and items. Such goods won't use up much of the seller's resources and will make a significant contribution to the total profit.

· Products in Category B are more crucial than those in Category C and less crucial than those in Category A. Stay in the middle, then. If sales are strong, this category in particular has the potential to either go up to category A or even down to category C.

· Items in category C have a modest value. These goods don't individually provide much value to the seller or the company, but they will allow you continue to run your business with a stable and reliable revenue.

Reasons to use ABC analysis

There are six reasons a company should choose ABC analysis are as follows:

1. Inventory optimization

The primary justification for why many firms use ABC inventory analysis is inventory optimization. to classify and arrange the inventory's items according to their value and income. The items are also divided into groups based on client need.

2. Resource allocation

Category A is being watched as the resource allocation procedure is being completed. It is possible to shift a product from category A to category B or category C if it is determined that it is not selling well or that customers no longer want it.

3. End-of-life management

A product's lifecycle always includes four stages: introduction, growth, and maturation. A product may be rejected sooner or later after it reaches the mature stage, but it will definitely happen. Customer demands determine a product's whole shelf life. A seller can manage supplies more effectively by using ABC analysis to assess client demand for a certain category of products. Every product has a different maturity and decline phase. More client demand pushes the likelihood of decline further. The smaller the market, the faster it will decline.

4. Customer service levels

A product's worth or significance might vary depending on the item's cost, the number of units sold, and the margin chosen. It is not necessary to overcrowd your warehouse with merchandise that has a poor margin and is not usually sold. In these situations, the planners can establish service levels based on the product classification using the ABC inventory system analysis. With no additional safety stockpiles, the supply chain is even more streamlined as a result.

5. Strategic pricing

When the pricing for the items are strategically established, the ABC analysis of the inventory also provides the business with much more value. The business will quickly be able to plan the expenses of the items and then appropriately align them into distinct categories thanks to ABC analysis. The greater the demand for a product, the greater the seller's potential for raising prices.

6. Supplier negotiation

It is acknowledged that 70–80% of the money is about to be put in such providers when it comes to finding the category A items. Negotiations are usually necessary. There is a potential a supplier will nod in agreement with your offer, but do not back down. You may still make concessions like waiving the delivery fee or lowering the down payment. Try to make the agreement win-win for you and the supplier, and there's a possibility you can come out on top in the negotiation. Spending less on category A goods might increase your company's earnings.

Industrial application of ABC analysis

The stock count cycles for supply chain and warehouse management often employ ABC inventory analysis. Category A items, for instance, will be measured quarterly since they are more important and valuable than category B products, which may be counted twice a year, and category C products, which can also be counted once a year.

Stock analysis and replenishment frequency are two things that stock counting may help you determine in addition to helping you examine your highly valued commodities. Depending on the type of goods, and in accordance with their own established rules, the process of replenishing may also be referred to as reordering.

Never rearrange category C items in the same manner as category B ones. Your money will be held up needlessly because of this. The majority of wholesalers and distributors do not put this into effect, which, regrettably, results in a significant amount of working capital being locked up in unsound stocks and goods.

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