If you’re a construction professional searching for a simpler way to efficiently manage your sprawling tool inventory, the ABC analysis method may be just what you’re looking for.
In a nutshell, ABC analysis is a time-tested approach to organizing you inventory in a way that prioritizes the tracking, management, and security of your most vitally important assets.
Tired of constantly struggling to locate the tools and materials you need most to get the job done? Adopting ABC analysis might help.
In this article, we will define what ABC analysis is, explain how it works, discuss its application in the world of construction inventory management, and explore some of the benefits that ABC Analysis can provide to your business.
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What is ABC Analysis?
ABC analysis (sometimes referred to as “ABC Classification” or “Always Better Control”) is a well-known and easy-to-use strategy for organizing inventory items according to their value.
ABC analysis is rooted in the Pareto Principle, also known as the 80/20 rule. Coined by Joseph Juran in 1937, the Pareto Principle is based on an observation by Italian economist Vilfredo Pareto, who noted in 1895 that 20% of people hold 80% of wealth. Juran—widely known as the “father of quality management”—extrapolated that Pareto’s observation was universal. That is, wherever you look, roughly 80% of all outcomes are generated by only 20% of causes.
While by no means an ironclad law of physics, the Pareto Principle has proven itself a useful heuristic in a variety of contexts. Nowadays, the 80/20 rule helps guide the internal processes of everything from retail to supply chain management, and is a core tenet of Just-In-Time production and Lean manufacturing.
This is where ABC analysis comes back into focus: Developed in 1951 by General Electric engineer H.Ford Dickie ABC analysis picks up the thread of the Pareto Principle in the context of inventory management, with the starting premise that 20% of items in an inventory hold 80% of the value. As an inventory management method, ABC analysis has become so ubiquitous that it now appears as a built-in function in many Enterprise Resource Planning (ERP) software platforms, including Netsuite by Oracle.
How Does ABC Analysis Work?
ABC Analysis ranks inventory items from most to least valuable by sorting them into three buckets—A, B, and C.
Here’s how it works:
A—Most Important
These are the items in your inventory that have the most value, and should therefore receive the most attention. In accordance with the 80/20 rule, Class “A” items are comprise 20% of total inventory, yet are enormously important to the financial health and performance of your business—driving 80% of total value. In an ABC inventory analysis, Class “A” items should receive the highest priority in terms of controls and recordkeeping accuracy.
B—Moderately Important
These are the items in your inventory that have average value. In general, roughly 30% of total inventory is Class “B” items, representing about 15% of value. Class “B” items float in value somewhere between Most (A) and Least (C) Important, and may drift between categories. It is for this reason that Class “B” items should receive moderate attention in an ABC inventory analysis.
C—Least Important
These are the items in your inventory with the lowest value. Roughly 50% of items fall into this category, representing 5% of total monetary value.
ABC Analysis in Construction Inventory Management
In ABC analysis, an item’s value is traditionally defined by the single criteria of how much the item is worth in terms of dollars. That is, the item’s price tag, or the extent to which it drives sales or profitability.
There are, however, multi-criteria approaches to ABC analysis that seek to organize items according to hierarchies of usage, demand patterns, durability, and more. How an item’s value is defined ultimately depends on the aims of the industry or business deploying the ABC analysis.
If you’re a construction inventory manager who’s curious about how to apply ABC analysis, you might think of an item’s value both in terms of its price tag as well as how essential it is to the completion of your work.
Here’s an example to illustrate the point:
Let’s say you’re an electrical lineman. Odds are that your M18 FORCE LOGIC™ cordless utility crimper is more valuable from both a monetary and a work-focused perspective than the $15 set of pliers in your tool belt. Therefore, the pricey cordless utility crimper that you repeatedly use throughout the day would be placed in Class “A”. Meanwhile, the inexpensive and easy-to-replace pliers would likely be sorted into Class “B” or “C”, depending on how frequently you use them.
Beyond identifying the value of items, ABC analysis is also useful for answering a variety of other fundamental questions related to inventory management: Where should your most important tools be placed for greatest ease of access? What security measures should be implemented to protect said tools? And what storage methods should be employed to optimize the organization of your tool inventory?
Milwaukee®, can help answer these questions with its ONE-KEY™ inventory management platform and PACKOUT™ modular storage system.
5 Benefits of ABC Analysis
Inventory managers across all industries may be attracted to ABC analysis for a broad range of reasons. In general, poorly managed inventories can lead to the loss of mission-critical assets, resulting in lowered productivity and profitability. Tried-and-true inventory management methods like ABC analysis can streamline the inventory management process and help inventory managers make decisions about which items they should focus most of their attention on.
Here are a few benefits that ABC analysis can impart to inventory managers in the construction world:
Large Inventories Made Easy
ABC analysis is ideal for warehouse and crib managers who deal with vast inventories of building materials and tools. When the assets you’re responsible for number in the thousands, it’s virtually impossible to tailor specific inventory controls for each individual item. It therefore becomes necessary to adopt a method like ABC analysis that efficiently organizes complex inventories into broad but easy-to-understand categories classified by level of priority.
Optimize Your Inventory
As a business, construction relies on the timely and efficient marshalling of resources. Put another way: Without the correct tools and materials in hand, the work of construction simply cannot be accomplished. By providing an intuitive framework for optimally organizing your inventory, ABC analysis helps to ensure that all of your mission critical tools and materials are always within reach at a moment’s notice.
Increase Asset Turnover
There are many different types of turnover in the business world. Asset turnover is a measurement of how effectively your business utilizes its resources to generate profit. In the context of construction, your assets are your tools and equipment. A high asset turnover therefore signals that your tools and equipment are being efficiently put to use to drive success for your business rather than gathering dust on a rack somewhere. By prioritizing your highest value tools, ABC analysis can increase your asset turnover, ensuring that your most important assets are always effectively deployed when and where they are most needed.
Prevent Stockouts
Stockouts are what happens when a business runs out of a certain item in its inventory. In construction, an asset stockout might occur when a new job, say, calls for a SAWZALL®, but all of your units are scattered across other jobsites. ABC analysis can ensure that a stockout never occurs by identifying and closely monitoring the most important tools in your inventory.
Increase Efficiency
Inventory management can be an arduous and time-consuming process even when done well. When done poorly, the losses of time and productivity are magnified a hundred fold. ABC analysis removes a lot of the busywork from the inventory management process by creating an easy-to-follow framework that identifies which assets you should prioritize and how best to manage your limited time.
Bottom Line
ABC analysis is a time-tested strategy for simplifying the organization of complicated inventories in a way that prioritizes the items that matter most to the success of your business. Of the many inventory management methods that exist, ABC analysis has proven to be one of the most durable and versatile across industries. In construction, is one of many tools that—when used in combination with One-Key—can help streamline your inventory management process and enable you to focus on the job at hand.