Inventory Ranking Methods

In inventory management, you can use ABC codes and movement classes to identify categories of stock that may require different management and controls. By using these categorization methods, you can rank inventory items by their cost and turnover, respectively. This information can be used to group items for planning physical inventory counts and for making strategic and tactical decisions.

ABC Codes

Data gathered on various types of businesses shows that the 80-20 rule applies to most of them: 80% of the effect is generated by 20% of the cause. Similar logic generally applies to inventory:

• A small number of items (which can be designated with the A code) typically accounts for the largest value of stock.
• A slightly larger number of items (B code items) accounts for a smaller yet significant stock value.
• The remaining large number of items (C code items) accounts for only a small part of stock value.

Ranking items by stock values can be used as the basis for planning efficient physical inventories in which A items are counted more often than B items (which in turn are counted more often than C items). This reduces the total number of counts performed while maintaining more accurate inventory levels.

You define the ABC codes to be used for inventory items (stock items) by using the ABC Codes (IN208500) form. For each code, you specify the percentage threshold and the frequency of physical counts per year.

Assignment of ABC Codes

Initially, you can manually assign ABC codes to some items by using the General Settings tab of the Stock Items (IN202500) form, and the items will have the same code assigned in every warehouse until the code assignment is updated for the first time. You should assign codes to only items for which codes will be fixed (that is, not updated over time) and skip initial assignment for other items.

At the end of a financial period, you can use the Update ABC Code (IN506000) form to mass-assign ABC codes to items based on their stock-on-hand values. For the selected warehouse and financial period, the system assigns pending ABC codes as follows:

• The system arranges inventory items in decreasing order, based on their percentages of total stock.
• For each item, a subtotal is calculated as the item's percentage plus the previous subtotal (the sum of percentages of previous items).
• These subtotals are compared to the thresholds specified for codes as follows: Items for which the subtotals are less than the threshold for the A code are assigned the pending A code (including the item whose subtotal is equal to the A threshold if any). Items with subtotal percentages between the threshold for A and the sum of the thresholds for A and B codes will be assigned to the pending B code. Assignment continues in this fashion, and the subtotals for the C-code items should be greater than the sum of A and B thresholds and less than the sum of the A, B, and C thresholds.

You can view the list of the inventory items with their current and pending ABC codes, and update the ABC code assignments for all displayed items.

The ABC analysis gives you an immediate view of items that are expensive to stock. By using this analysis, you can learn where your money is locked up and reduce the stock of expensive items. When planning physical inventories, you can perform counts for items with each code at the appropriate frequency for that code.

Items with fixed codes are part of the assignment, but their codes do not change in accordance with the statistical data.

Movement Classes

As with ABC codes, movement classes group items based on key inventory data—in this case, stock turnover rates. Items are grouped into a few classes, such as fast moving items, normal moving items, slow moving items, and dormant items. For each movement class, which is defined on the Movement Classes (IN208600) form, you specify the frequency of physical counts per year and the threshold value based on turnover to assign inventory items to this class.

The number of turnover periods per year for all warehouses is specified (Turnover Periods per Year) on the General Settings tab of the Inventory Preferences (IN101000) form. Inventory turnover rate for an item for a period is calculated as Quantity Sold during a turnover period / Average Quantity on Hand. The Average Quantity on Hand is calculated as a sum of on-hand quantities at the end of each last 12 periods divided by the number of periods in the last financial year, including the analyzed period.

Assignment of Movement Classes

You can initially assign items to movement classes by using the Attributes tab of the Stock Items form; these items will have the same class in every warehouse until movement class assignments are updated for the first time. You might instead initially assign to the classes only items for which class assignment will be fixed and skip assignment for other items.

You can update movement class assignments for a particular warehouse and a selected turnover period by using the Update Movement Class (IN506100) form. The system assigns movement classes to items as follows:

• For each warehouse, the system arranges inventory items in decreasing order by their average turnover rate in this warehouse (Quantity Sold during a turnover period/ Average Quantity). The Average Quantity on Hand is calculated as a sum of on-hand quantities at the end of each last 12 periods divided by the number of periods in the last financial year, including the analyzed period.
• For each item starting from the item with the highest turnover rate, the item's turnover rate is compared to the thresholds (maximum turnover rates) defined for each movement class. If the item's turnover rate is less than or equal to the lowest threshold, the item is assigned to the appropriate class. If the item's turnover rate is between two successive thresholds, that is, less than threshold of the class N and greater than or equal to the threshold for the class M, then the item is assigned to the class N.

When planning physical inventories, you can organize counts by the frequencies specified for movement classes. Thus, you can perform counts for items with higher turnover rates more frequently. Items of each movement class will be counted at the frequency you've specified for the movement class.