Effective inventory management begins with strategic item classification. All items within a business are categorized into one of three primary classifications: stocked, non-stocked, or obsolete. This initial stocking indicator dictates how an item will be managed and replenished.
Stocked items undergo standard ordering processes and are intended to fulfill customer demand directly from available inventory.
Non-stocked items are only procured when there is confirmed customer demand, typically for slower-moving goods where customers are willing to wait.
Obsolete items are never replenished, regardless of existing stock or sales potential.
The 9-Block Classification Matrix
Stocked items are further refined using a dual-ranking system that considers both their value contribution (A, B, C) and their unit movement (H, M, L). This dual approach results in the 9-block classification matrix, providing a granular view of inventory criticality.
By default, the classification parameters are set as follows:
A-items: Account for 80% of total sales value.
B-items: Account for the next 16% of total sales value.
C-items: Account for the remaining 4% of total sales value.
Similarly, for unit movement:
H (High) items: Account for 80% of total sales units.
M (Medium) items: Account for the next 16% of total sales units.
L (Low) items: Account for the remaining 4% of total sales units.
See Classification Parameters and Setup for more information on how this is configured.
How Classifications Are Determined
The classification process involves a systematic calculation based on an item's sales units and sales value.
Below is an example of 12 items, their cost, and sales units.
Unit Movement (H, M, L) Calculation
To classify items by unit movement, stocked items are:
Sorted: From the highest to the lowest number of sales units.
Calculate Cumulative Sum: The cumulative sum of sales units is calculated for each item in the sorted list.
Totaled: The grand total of all sales units is determined.
Thresholds Defined:
80% Threshold: 0.80 multiplied by the total sales units = 18348
96% Threshold: 0.96 (80% + 16%) multiplied by the total sales units = 22018
100% Threshold: 1.00 (80% + 16% + 4%) multiplied by the total sales units = 22935
Assigned:
Items with a cumulative total of sales units up to the 80% threshold are classified as H (High) items.
The next set of items, pushing the cumulative total to the 96% threshold, are classified as M (Medium) items.
The remaining items are classified as L (Low) items.
NOTE: An item is only moved into the next category once the cumulative sum of the preceding items exceeds the category's threshold.
Sales Value (A, B, C) Calculation
The same methodology applies to classify items by sales value:
Sales Value Calculated: Each item's sales value is determined by multiplying its cost by its sales units.
Sorted: Items are sorted from the highest to the lowest sales value.
Calculate Cumulative Sum: The cumulative sum of sales value is calculated for each item in the sorted list.
Totaled: The grand total of all sales values is determined.
Thresholds Defined:
80% Threshold: 0.80 multiplied by the total sales value = 218688
96% Threshold: 0.96 (80% + 16%) multiplied by the total sales value = 262426
100% Threshold: 1.00 (80% + 16% + 4%) multiplied by the total sales value = 273360
Assigned:
Items with a cumulative sum of sales value up to the 80% threshold are classified as A items.
The next set of items, pushing the cumulative sum to the 96% threshold, are classified as B items.
The remaining items are classified as C items.
NOTE: An item is only moved into the next category once its cumulative sum exceeds the category's threshold. In our example below, the cumulative sum of chewing gum did not exceed the threshold of 262426, meaning that the Magazine can’t be classified as a C item yet.
The Combined Matrix
Once both classifications are determined, each item finds its unique position within the 9-block matrix (e.g., AH, AM, AL, BH, BM, BL, CH, CM, CL).
NOTE: Not every category within the matrix is guaranteed to contain items; some may be empty depending on your inventory's specific characteristics. In our example, we had no overlap of items that were classified as both C and H.
Frequently Asked Questions (FAQs)
Expand to view Frequently Asked Questions (FAQs)
Expand to view Frequently Asked Questions (FAQs)
Q: Are all inventory items included in the calculation of ABC or HML classifications? A: No, typically only "Stocked" items are considered for these classifications.
Q: Is the ABC or HML classification solely based on historical sales data? A: Not necessarily. Depending on the application's configuration, the calculation may incorporate either a future forecast or historical sales data. (Navigate to Settings > Classification > ABC items or HML velocity items.
Q: What is the typical timeframe used for these classification calculations? A: A 12-month period is generally used. This means the calculation can be based on either a 12-month average future forecast or a 12-month average of historical sales.
Q: Are only Sales Forecasts utilized in the classification calculation? A: No, the calculation extends beyond just sales forecasts to include all dependent demand streams, such as Distribution Center (DC) demand and Bill of Material (BOM) demand. Therefore, the classification is based on total demand.
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