We all know that the world of eCommerce is rapidly growing, evolving, and changing daily. In this highly competitive environment, we've previously & repeatedly discussed just how crucial inventory management is. Therefore, it is also significant to develop it and feed it with the right features because your eCommerce store may fall behind its competitors. That's why our topic today is one of the methods to manage your eCommerce inventory more smartly: importance, benefits, shortcomings, and effective usage of ABC Analysis for your eCommerce inventory. So, let's dive into it. 🚀

What is ABC Analysis for eCommerce Inventory?

ABC Inventory Analysis basically provides a method for you to categorize your inventory or products based on their value to your eCommerce business. We all know certain products perform better than others, don’t we? So, you invest more effort, attention, and energy in monitoring the top performers and don't spend as much energy on the weaker ones.

ABC Analysis, historically, originates from the Pareto Principle, also known as the 80/20 rule, which suggests that roughly 80% of the effects come from 20% of the causes. What does this mean in simple terms? 🤔 Applying this same ratio to inventory means that 20% of the products you sell generate 80% of your revenue. Therefore, this calculation suggests giving more time, investment, and energy to the 20% of products that bring in revenue, rather than the remaining 80%. ABC Analysis is shaped through this principle.

ABC Inventory Analysis categorizes eCommerce inventory goods into three groups: A (high-value products), B (medium-value items), and C (low-value items) based on their value to your business.

🌟 Item A: Stars of your eCommerce shop. These are the top-selling items that require regular restocking due to high demand. They make up a small portion of your inventory but generate 80% of your store’s revenue. eCommerce stores should prioritize them to prevent out-of-stocks and keep them secure in warehouses.

💼 Item B: These items generate 15% of revenue with moderate sales and profits and have a slightly larger inventory than item A. They are regularly checked to determine if they should be categorized as A or C.

⏳ Item C: These items have high inventory levels but low sales, generating only 5% of the revenue. They tend to stay in inventory for a long time due to low demand. Setting a low reorder point for them and selling them out before restocking may be beneficial for your eCommerce business. You can easily calculate the reorder point with our guide.

How to Manage A, B, and C products?

If you categorize your products according to ABC Analysis, you need to take action to increase the efficiency of your inventory. What can you do?

🤩 Category A (High-Value Products):

• As A products are the best-selling items in your store, prioritize the stock level of it to prevent out-of-stock. Besides, with backorders, keep selling your customers’ favorite products continuously even when they are temporarily out-of-stock.
• Benefit from marketing campaigns and discounts for Category A products to sell more and increase your profit.
• Attract more customers and boost sales by making Category A products stand out on the website, landing pages, and promotions.
• Adjust prices based on demand changes to make the most of Category A products and earn more revenue.

🙂 Category B (Moderate-Value Products):

• Keep just the right amount of Category B products in stock to meet demand without overdoing it or blocking too much capital.
• Use a balanced approach for marketing Category B products, focusing on targeted campaigns and suggesting related products.
• Offer competitive prices for Category B products to attract customers and still make a profit.
• Boost sales and customer interest by bundling Category B with other products or suggesting complementary items.

🤔 Category C (Low-Value Products):

• When making decisions about these items, consider different perspectives because unsold items will result in extra storage costs.
• Discount or clear out slow-moving Category C items to make room for other inventory and bring in cash flow.
• Use bundle strategy and combine Category C products with higher-value items A and B to make them more appealing and increase their sales.
• Regularly assess how well Category C products are doing and think about discontinuing those that don't sell well or aren't profitable.
• Consider including these items as complimentary gifts for customers to encourage brand loyalty and attract new shoppers to your store.

Overall, the approach to managing A, B, and C products in eCommerce involves a combination of inventory optimization, targeted marketing, pricing strategies, and product bundling to maximize sales, profitability, and customer satisfaction. Continuously monitoring performance and adjusting strategies based on evolving market conditions is essential for success in eCommerce.

Let’s understand the application of ABC Analysis with an example.

ABC Analysis Example

Let's imagine you have an accessory store at Shopify, where you sell jewelry pieces such as necklaces, bracelets, and earrings. However, to diversify your product range and attract more customers, you decided to introduce additional items like scarves and hats. 👒 Despite these new additions, you observed that the sales of these new accessories were slower compared to your core jewelry items, leading to an increase in stocking costs. To address this issue, you implement ABC Analysis. 📊

You categorize your accessories into A, B, and C categories for ABC Inventory Analysis:

• Category A: This includes your main products such as necklaces and bracelets, which boast high demand and contribute significantly to your revenue stream. After the analysis, you know you should prioritize stocking levels to avoid stockouts, implement targeted marketing campaigns for these products.
• Category B: Items like scarves and hats are essential for your store's offerings but may not enjoy the same level of popularity as those in category A. Their demand might be seasonal, and they're often sold alongside your core jewelry items. That’s why you decided to offer bundle deals with category A products while maintaining optimal inventory levels.
• Category C: Additional accessories or items with lower demand or profit margins fall into this category. These items require careful management to balance stocking costs and sales performance. After this analysis, you decide to regularly assess the sales performance of Category C products, considering discounting or bundling options.

We explored how ABC Analysis can be used simply and how a store owner can make decisions based on this analysis. Now, let's explore the specific benefits of implementing ABC Inventory Analysis for your eCommerce inventory management.

Benefits of Using ABC Inventory Analysis in eCommerce

We understood how ABC Inventory Analysis works, and now it’s time to discover its benefits for eCommerce stores.

🔵 Optimized Inventory Management: By sorting products by importance, eCommerce businesses can focus on managing inventory better. This means prioritizing A(high-value) items while still having enough B(moderate) and C(low-value) products.

🔵 Maximized Profitability: Thanks to ABC Analysis of inventory, you can better analyze and manage the sales processes of high-selling items while also assessing less popular items more accurately and generating cash from them. By maximizing profits from best-sellers and reducing costs by minimizing the timeless popular items spent in storage, you can maximize your overall business profit.

🔵 Improved Customer Experience: Ensuring the availability of A(high-demand) products is crucial to maintaining customer satisfaction and loyalty. ABC Analysis helps eCommerce businesses identify which products are most valuable to their customers and prioritize efforts to ensure adequate stock levels and timely fulfillment.

🔵 Optimized Procurement and Supplier Relationships: With ABC Analysis, eCommerce businesses can negotiate better with suppliers for high-value items and optimize procurement processes to ensure timely delivery and cost-effectiveness. This helps in reducing inventory holding costs and improving overall supply chain efficiency.

🔵 Managing Storage and Warehouse Space: Ensuring quick access and efficient storage is crucial not only for high-value Category A items but also for B and C items. By focusing on all categories, businesses can organize warehouses for fast retrieval, ensuring prompt fulfillment of customer needs across the board.

🔵 Identified Opportunities for Promotion and Marketing: ABC Analysis of inventory helps eCommerce businesses identify which products deserve more attention in terms of marketing, promotions, and cross-selling efforts. By focusing promotional activities on high-value items, businesses can maximize the return on their marketing investments and drive sales growth.

ABC Analysis in eCommerce provides valuable insights into inventory composition and helps businesses make data-driven decisions to optimize operations, enhance customer satisfaction, and maximize profitability in the competitive online marketplace.

Shortcomings of ABC Inventory Analysis in eCommerce

ABC Inventory Analysis is crucial because accurate inventory analyses when done based on up-to-date and reliable data, enhance the efficiency of your eCommerce store. Also, it makes decision-making easier for the future. However, there are some shortcomings of ABC Analysis. Let's discover them together by using an example.

For the second time today, imagine you have an eCommerce clothing store. 🏬 The inventory status of your store is really important to you because there is a continuous online sales process. Your expectation is to be able to make long-term planning, thus preventing out-of-stock and unnecessary storage costs for unsold items. You will be able to manage campaigns accordingly,  make confident agreements with suppliers, and run the entire inventory process more efficiently. Due to the numbers and variety of products in your store, it's unfortunately not that easy to access accurate insight about your inventory and make future decisions. To achieve this you decided to use ABC Analysis of inventory, but it has some shortcomings too.  👗👕 👖👚🧥 👔

🟠 Seasonality:  ABC Analysis, which mainly relies on past data, might not catch onto the current trend of customers getting ready to buy summer outfits. It's like trying to predict tomorrow's weather by only looking at yesterday's forecast, leaving you unprepared for the sudden surge in demand for shorts and tank tops.

🟠 Trends and Customer Behavior: Let's say there's a sudden shift in fashion trends, with customers interested in a new style of jeans. ABC Analysis, based on past data, might miss out on this quick market change. This oversight could leave your inventory outdated, with shelves full of last season's styles while customers are searching online for the latest trends.

🟠 New Product Launches:  You're excited to launch a new line of eco-friendly activewear. But ABC Analysis, lacking data on similar products, might not accurately predict its demand. This could result in either overstocking or understocking, leading to inventory issues.

🟠 Complexity and Time: Categorizing all your products for ABC Analysis of inventory can be like organizing a messy closet—it takes a lot of time and effort. This task becomes even more challenging for eCommerce businesses with a wide range of products.

🟠 Lack of Human Touch: While ABC Analysis focuses on monetary factors, it overlooks important aspects like brand reputation. This method might lead to decisions that don't consider what's best for your brand and customers.

Even though ABC Analysis has its flaws, it's still useful for managing inventory in eCommerce. But it's good to know about these limitations and look from different perspectives before making decisions.

We have compiled some tips to help you minimize the shortcomings of ABC Inventory Analysis and manage this process more successfully.

Useful Tips for ABC Analysis in eCommerce

Implementing ABC Analysis in eCommerce requires careful planning and execution. Here are some useful tips to make the process more effective:

• Establish Clear Criteria: Define specific criteria for categorizing products into A, B, and C groups. Consider factors like revenue contribution, profit margins, and sales volume to ensure consistent classification. 🎯
• Keep Data Updated & Regularly Review and Adjust: Ensure your data is current by regularly updating sales, revenue, and inventory information. This guarantees that your ABC Inventory Analysis accurately reflects current product performance, enabling you to make necessary adjustments in response to market changes and product performance. 🔄
• Leverage Automation: Use automation tools to make collecting, analyzing, and categorizing data easier. This saves time and minimizes errors, making your ABC Inventıry Analysis faster and more accurate. ⚙️
• Use Different Measures and Divide Products: Think about using more than just sales numbers to sort products. Also, consider splitting product groups based on things like who buys them or when they're popular during the year for better planning. 📊
• Focus on Actionable Insights: Instead of just categorizing products, focus on deriving actionable insights to optimize inventory management, pricing, and promotions. 🔍
• Integrate with Other Tools: Combine ABC Analysis with tools like demand forecasting and inventory management for a complete approach to managing your eCommerce business. This combination improves your analysis and decision-making. 🛠️

By following these tips, eCommerce businesses can leverage ABC Analysis to make data-driven decisions, optimize inventory management, and drive profitability in the competitive online marketplace. To achieve this, consider using Fabrikatör, a powerful inventory management tool designed to streamline operations and enhance decision-making.

Fabrikatör for ABC Inventory Analysis in eCommerce

Fabrikatör is an inventory management software tool that you can use fully integrated with your Shopify store. Fabrikatör aims to optimize inventory management with functions such as:

🔮  Inventory planning & forecasting

📦  Easily creating purchase orders,

🔄  Managing preorders and backorders,

📊  Generating custom reports just like the Sales Performance Report for data-driven decision-making.

Fabrikatör way of saying ABC Analysis is Sales Performance Report. Imagine you have four different detergent products named The Sea, Summer, The Grass, and the Sun. According to their sales performance, this is the screen you will see.

In Fabrikatör’s Sales Performance Report, items are categorized as A(fantastic), B(moderate), and C(poor). Unlike ABC Analysis of inventory, Fabrikatör includes a fourth category in addition to the three categories, called D(idle). When a product is categorized as D(idle), it means they are not sold in the last 30 days.

By using Fabrikatör’s ABC Analysis/Sales Performance Report, you can:

• Gains insights about your inventory composition and prioritizes your management efforts accordingly. 📊
• Add the Sales Performance Report to your control center to keep an eye on the current status of your inventory.  📦
• Manage your resources more effectively, focusing on critical items while optimizing inventory levels, procurement strategies, and storage space utilization. 🛍️
• Identify opportunities to improve operations. 🔍
• Improve customer experience. 👍
• Enhance overall profitability in the competitive eCommerce environment.  📈

To explore the Sales Performance Report and more, book a demo now!