Modern decision-makers use various types of analytical techniques to process widely available information in order to improve their decision-making. This also applies to the analysis of inventory, and especially to the appropriate classification of assortment items into specific groups. The primary task of rational inventory management is to ensure the continuity of production and sales at the lowest possible inventory management costs.
One such method used in logistics, including material inventory management, is the ABC method, which is based on the V. Pareto principle. The ABC method is most often used to divide inventory – according to sales value or consumption for a given period – into three groups of varying importance to the company. It is an indispensable tool wherever it is necessary to manage many types (categories) of inventory and considering each item individually is impossible or difficult.
Many integrated information systems have built-in functionality based on the Pareto principle in their original version, but in the Polish SME sector, there is not always awareness and knowledge among staff on how to effectively use such tools. To this end, the author used examples of such tools available in ERP class systems dedicated to the SME sector, such as Microsoft Great Plains Dynamics and SAP Business One. The main objectives of the article include:
- presentation of the assumptions (premises) for using the ABC method in an ERP system,
- specification of the advantages of using the ABC method compared to other methods: for example, XYZ and VED,
- presentation of practical examples of using the aforementioned IT tools in inventory management.
The author bases the article on observations of organizations that use ERP systems and the author’s many years of experience in implementing these solutions in the SME sector.
The essence of ABC analysis – a literature review
ABC analysis is based on the principle/law of Vilfredo Pareto (1848-1923), also known as the 80-20 rule, according to which 20% of causes produce 80% of effects. V. Pareto, an Italian economist, was perhaps the first scientist to conduct research on the distribution of income in society. Already in the 19th century, he noticed a certain (surprising) regularity that only 20% of the people surveyed possessed almost 80% of all wealth in society. This regularity was confirmed in several countries he studied. Pareto therefore considered it a universal principle that in various spheres of human activity, 80% of all effects are influenced by only 20% of causes. For example: 80% of the value of inventory turnover is accounted for by only 20% of the number of goods. This regularity was used, among others, by quality management classic Joseph Juran, who formulated the principle of “vital few and the useful many”. He emphasized that this principle applies to production systems, where about 80% of reported problems resulted from about 20% of defects. It was therefore necessary to diagnose only 20% of defects to significantly reduce the number of reported problems (by 80%). This principle has been implemented in various fields of human activity. The ABC method (Always Better Control), based on Pareto’s law, has its roots in material inventory management, especially in organizations with a wide range of assortment that is very diverse in terms of unit value, storage methods, size, ordering methods, etc.
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Source: Logistyka Magazine