Carrying costs keep climbing, and nobody can say which products are responsible.
Most businesses have cash sitting in slow-moving stock without knowing which stock. The inventory gets managed as one number. Carrying costs rise, profit shrinks, and every product gets the same attention whether it earns it or not.
ABC analysis is the simplest way to stop treating every product the same. Read for cash, it also answers the question the CFO is asked: which lines hold the capital?
The 3 categories
- A items. A small share of the products, the largest share of revenue.
- B items. The middle: they sell consistently and do not hit the peaks.
- C items. A large share of the products, the smallest contribution to the bottom line. These are the ones that sit in the warehouse for months.
Start from the sales data and sort every product into one of the 3. It is common to find that 20% of the products bring 80% of the revenue.
What is found when it is read for cash
The ranking by revenue is only half of it. Put the inventory value held in each category beside the revenue it brings, and the picture changes: the C items earn the least and often hold a share of the capital far above their share of sales.
What it costs
Every $1,000 of surplus stock costs $20 to $30 a month in storage, handling and financing. That cost is paid whether the product sells or not, and the longer the decision waits, the more of it is paid.
The fix: a different rule for each category
- Analyze the sales data. Sort the products into A, B and C, with the inventory value of each.
- Set stock levels by category. A items are always available. B and C items are held on purpose, not by habit.
- Monitor and adjust. Demand moves, so the categories are reviewed on a schedule.
Then the decisions the ranking makes possible:
- Negotiate with suppliers on the A items, with the data to show what they are worth.
- Clear the excess in slow C items with discounts or bundles, and stop reordering them on schedule.
- Put the released cash behind the A items.
The result
A consumer goods company with unpredictable demand and a growing product list used ABC analysis to map demand, profitability and order frequency by product. Products were consolidated and packaging variations reduced. Storage and transport costs came down, production schedules smoothed out, and cash flow became far more predictable.
The method is simple. What it gives a finance leader is the answer to "where is the cash?" by product line, with a number beside it that can be defended.
Is this your number?
If sales are fine and the cash never is, this is the work: where the money is stuck, and which decisions put it there.