All items in a business will be classified as either stocked, non-stocked or obsolete. This primary classification, or stocking indicator, will impact the ordering for the item, as obsolete items will never be replenished, non-stocked items will only be replenished if there is firm demand and stocked items will undergo the normal ordering process.
These stocked items are further separated using a dual ranking movement, taking into consideration the value that an item brings in (A, B and C) as well as the unit movement (H, M and L). The result is the 9 block classification matrix.
As a default, A items account for 80% of your sales value, B items account for the next 16% of your sales value and C items account for the remaining 4% of your sales value.
Similarly, H (high) items account for 80% of your sales units, M (medium) items account for the next 16% of your sales units and L (low) items account for the remaining 4% of your sales units.
See Classification parameters and setup for more information on how this is configured.
But what does this all mean? How is it decided whether an item will be classified as A, B or C? High, Medium or Low?
Below is an example of 12 items, their cost and sales units.
To determine whether an item should be classified as High, Medium or Low, we start by sorting the items from most sales units to least sales units and calculating the total.
Next, we calculate 80% of the total, 96% (80% plus 16%) of the total and 100% (80% plus 16% plus 4%) of the total.
80% of the total = 0.8 * 22935 = 18348
96% of the total = 0.96 * 22935 = 22018
100% of the total = 1.0 * 22935 = 22935
The top items with a cumulative total of around 18348 are classified as H items, the next set of items with a cumulative total of 22018 (excluding H items) are classified as M items and the remainder are classified as L items.
NOTE: An item will only be moved into the next category if the cumulative sum of the previous item exceeded the threshold.
The same calculation applies when determining whether an item will be classified as A, B or C.
We start by calculating the sales value of each item by multiplying the item cost with the sales units.
We then sort the items from highest sales value to lowest sales value and calculate the total.
Next, we calculate 80% of the total, 96% (80% plus 16%) of the total and 100% (80% plus 16% plus 4%) of the total.
80% of the total = 0.8 * 273360 = 218688
96% of the total = 0.96 * 273360 = 262426
100% of the total = 1.0 * 273360 = 273360
The top items with a cumulative total of around 218688 are classified as A items, the next set of items with a cumulative total of 262426 (excluding A items) are classified as B items and the remainder are classified as C items.
NOTE: An item will only be moved into the next category if the cumulative sum of the previous item exceeded the 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.
Using the classifications derived above, the items’ position in the matrix will be as follows:
NOTE: Not every category MUST include items. In our example we had no overlap of items that were classified as both C and H.
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