ABC analysis and counting

A warehouse might hold 10,000 different items, called SKUs (stock keeping units). They don't all deserve the same attention. ABC analysis sorts them by the value that flows through them in a year: annual usage in units × unit cost.

Sort every SKU from the highest annual value to the lowest and add them up as you go. Usually a small share of SKUs makes up most of the value, an example of the 80/20 rule. A common cut: A items are the top 20% or so of SKUs and about 80% of the value; B items the next 30% and about 15%; C items the last half of the SKUs and only about 5% of the value.

Then manage each class to match. A items get the most care: tight forecasts, frequent reviews, close supplier relationships and little spare stock, because every extra unit is expensive. C items get simple rules and plenty of safety stock, since holding a few more cheap items costs little and running out of a 10-cent washer can still stop a job.

Records drift away from what's really on the shelves: miscounts, damage, theft, things put in the wrong place. Instead of shutting down once a year to count everything, most warehouses do cycle counting: count a few locations every day, so everything gets counted over the year, and A items more often (say monthly), B quarterly and C once or twice a year.

Inventory record accuracy is the share of counted locations where the system matched the shelf. Good warehouses aim for 98% or better, because every planning decision in this course assumes the stock figure is right.