Quick Summary: The app calculates ABC (value) and HML (velocity) classifications using cumulative percentage splits, which clarifies why item assignments often differ from simple percentage expectations.
For necessary background, please preread Mastering Classifications before proceeding with this article.
Why the Calculation Method Matters
Understanding the calculation method is key to troubleshooting why an item is assigned to a specific bucket (for example, why an item is a B instead of an A). The system does not take the top 80% of items; it uses a cumulative sum approach to determine where the cutoffs for A/B/C and H/M/L fall.
The Calculation in Action
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 their sales velocity, the system performs the following steps:
Sort: All stocked items are sorted from the highest to the lowest number of sales units.
Calculate Cumulative Sum: The system calculates the cumulative sum of sales units for each item in the sorted list.
Total: The grand total of all sales units is determined.
Define Thresholds: The system determines the unit thresholds for each category based on the percentages set in your configuration
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
Assign: Items are assigned to a category.
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. In the example below, "Shampoo" is classified as H because the cumulative sum of the items before it (17,100) did not exceed the 80% threshold (18,348). "Wine" is the first item to be classified as M because the cumulative sum of "Shampoo" (19,200) finally crossed that 80% threshold.
Sales Value (A, B, C) Calculation
The same methodology applies to classify items by sales value:
Calculate Sales Value: Each item's sales value is determined by multiplying its cost by its sales units.
Sort: Items are sorted from the highest to the lowest sales value.
Calculate Cumulative Sum: The cumulative sum of the sales value is calculated for each item in the sorted list.
Totaled: The grand total of all sales values is determined.
Define Thresholds: The value thresholds for A (80%) and B (16%) are 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
Assign: Items are assigned to their value category.
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.
FAQs on Classification Percentages
Click to view details
Click to view details
Question: Are all inventory items included in the calculation of ABC or HML classifications?
Answer: No, typically only "Stocked" items are considered for these classifications.
Question: Is the ABC or HML classification solely based on historical sales data?
Answer: 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.
Question: What is the typical timeframe used for these classification calculations?
Answer: 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.
Question: Are only Sales Forecasts utilized in the classification calculation?
Answer: 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.
How To: Set Classification Parameters
⚠️ Watchouts
Threshold rule: An item moves into the next category (for example, B or M) only after the cumulative sum of the items before it exceeds the configured threshold.
💡 Tips
Empty categories are possible: Some cells in the 9-block matrix can be empty depending on your sales and value distribution.
Forget about these 👇 😞 😐 😃 Have your say here!