What is the ABC Stock Curve?
A ABC stock curve is a method widely used in stock management to classify and group the different items according to their importance to the performance of the business. When using the ABC curve, you will create a forced distribution curve of your items by following the following rule in general:
- Category A: 20% of products with higher added value
- Category B: 30% of products with higher added value below A
- Category C: 50% of the products, the remainder
The calculation of the value added of each product, as well as the specific percentages of the cut between A / B / C, can be made from several methods and will vary from company to company. The ABC curve can be used for both raw material and finished products. In general, some formulas of classification are used:
- In products already finished: you can use criteria such as price of production / purchase of the product, final value of sale, contribution margin or even your average monthly profitability based on your sales history. The latter would be preferable as it allows a better comparison between items with different turns.
- For raw materials: in this case, the criteria may be acquisition cost, stock turnover, risk factors such as fragility, maturity or storage. In addition to these, you can also use the total stock value per product type.
Benefits of ABC Curve
It is usually high volume companies that apply the ABC curve because with it you can:
- Focus on inventory management
- Ensure that the main products will always be up to date
- Decrease costs with unnecessary purchases
- Store and invest according to the importance of the item
- Reduce stock shortages
- Better protect your assets
A classic example of applying the ABC curve is you think of a cellphone store, but they also sell hoods and accessories. It is much more important for you to keep well and ensure the perfect inventory status of cell phones that have a medium ticket and higher profitability than worrying about stocking up with interesting, but not crucial, products.
Practical Case of Application of the ABC Curve
Let's make a fictitious case here of a company that has 20 products already finished and that it has the data of sales value, contribution margin and also potential monthly sales, as picture below:
Assuming you want to use the sales value criterion to make your ABC curve, it would be pretty easy to see in the spreadsheet that the 17, 18, 19 and 20 products would be A because they correspond to 20% of your portfolio (4 a total of 20 = 20%). Already the products of 16 to 10 would be the products B and the rest C.
However, the sales value rating is only an approximation of how much that stock really holds for you. If we want to go a little further, we can add the sales potential of that product and check the expected gross revenue.
In doing so, we see that there is a small change in our table. I'll put the image re-ordered below:
Now we see that the 3 product, because of its high turnover, actually has a total turnover that is much higher than the 19 product. Therefore, in this improved classification, we have the 20, 18, 17 and 3 products as A.
Finally, we can go a little further in our analysis and try to understand which products bring more money to our pocket, that is, have the best contribution margins and sales volume! These, yes, are the most important products at the end of the day. Let's see the new image:
Looking at the expected profitability of each product, we see a total turnaround in our inventory management. The products that seemed to have importance for their expected value or revenue, are completely out of the ranking and now we have as products of classification A: product 7, 3, 19 and 6!
Other Applications of the ABC Curve
Although its use is very common in the inventory area, this is a prioritization method that can be applied to different challenges of a business. I will cite below some other examples:
- Cost analysis
- Purchasing Optimization
- Employee Performance Evaluation
- Top Customer Ratings
- Business Process Improvement
With this well-structured information, you will understand much better the value of your inventory and manage to manage it with less costs, maximizing the final profit! If you are having difficulty applying in your business, leave a comment that we can help you!