A recent issue of APICS Supply Chain Management Now entitled “Technology leads to tail-spend savings” serves as a reminder of both the value and the shortcomings of ABC classification as we use it in supply chain management today. As the article points out, we have been taught to divide items to be managed into three groups — A, B and C — based on percentage of cost, annual dollar volume or other criteria. According to the APICS Dictionary: “The A group usually represents 10 percent to 20 percent by number of items and 50 percent to 70 percent by projected dollar volume. The next grouping, B, usually represents about 20 percent of the items and about 20 percent of the dollar volume. The C class contains 60 to 70 percent of the items and represents about 10 percent to 20 percent of the dollar volume.” In other words, by focusing on the A items, we put our efforts where there is the most potential for return on investment.
The tail spend referred to in the article is represented by those C items, which are great in number but small in value. For example, if a company’s warehouse holds 1,000 different items cumulatively worth $1 million, it’s likely that 200 A items have a value of $800,000. The next 200, the B items, represent $100,000. The remaining 600 C items — which equal three times the number of B’s — also account for $100,000.
The study by McKinsey & Company referenced in APICS Supply Chain Management Now found that companies can unlock significant savings — as much as 15 percent — by optimizing C items, despite their low relative value. There are multiple reasons why this group of items holds such savings potential. First, item cost and value don’t tell the whole story. A missing screw or bracket can halt production or stop a shipment just as effectively as a missing circuit board or motor.
In addition, C items likely are the source of most excess and obsolete inventory. Because many C items are low in volume and demand — and therefore are difficult to forecast — the tendency is to stock more of them than is necessary, so Customer Relations levels don’t sink. This seems like a reasonable strategy, as the cost of C items is relatively low, but it also means these extra items are being managed ineffectively. Maintaining extra quantities takes up valuable warehouse space, they can get lost or damaged, and they all have to be cycle counted and insured. Additionally, because C items are often ignored, people may not notice when demand declines or completely disappears. At that point, the extra-large quantity on-hand becomes a complete waste.
Tools and tricks for the job
Software can help inventory managers collect and organize inventory data from enterprise resources planning systems, local databases, purchase orders and other documents. This makes it easier to track the C items in stock or in demand. Other solutions can enable procurement specialists to issue requests for information or proposals when a business needs to acquire more C items.
C items take a back seat when setting cycle count frequency, determining lot size and replenishment triggers, and conducting general inventory management. But they should not be completely overlooked. Certainly, focus on A items first and foremost, but once the A’s are firmly in-hand, the job is not done. Instead, take the lessons learned from setting up processes and controls for A items, and apply them to all inventory in order to unlock further savings and value.
Dave Turbide, CPIM-F, CIRM, CSCP, CMfgE, is a New Hampshire-based independent consultant and freelance writer and president of the APICS Granite State Chapter. He also is a Certified in Production and Inventory Management and Certified Supply Chain Professional master instructor and The Fresh Connection trainer. Turbide may be contacted at firstname.lastname@example.org.