Article storage by sales strength and importance

The basic idea behind selective warehousing is a differentiation of products according to their economic storage characteristics. A product is described here as economically storable when costs associated with shortages are greater than warehousing costs [1]. Shortages arise when a good is unavailable in storage and a customer buys the product from a competitor.
Frequently, the largest share of sales is achieved with just a relatively small quantity of items in a product range. According to a rule of thumb, 80 percent of sales come from 20 percent of items [2]. Use of an item/sales chart can pinpoint where sales are concentrated. Sales clusters can be represented by a concentration curve. When small price differences exist between items in a product range, the items can also be classified according to sales volume [3].

ABC analysis

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ABC analysis

In ABC analyses, goods are classified into three groups - A, B and C - in accordance with the size of their sales contribution.

“A” items are given substantially more attention than “C” items. As a result of their significant share of sales, the inventory value of “A” items is very high, and shortages of the item can lead to large losses.
However, it can make sense to place priority on an item in the C category - if it plays a particularly “critical” role for the customer. In considerations about selective warehousing, this critical parameter and/or significance factor must also be considered, along with the share of sales [3].
ABCD policy
The ABC analysis can also be used to determine the appropriate way to warehouse items at different points of distribution. A comparison of warehouse cost reductions and transport cost increases can lead to the conclusion to store top-selling items in a larger number of decentralized distribution points while storing low-selling items centrally, when possible. The classic division into A, B and C items can be complemented by D items - hence the ABCD policy [2]:

• A items: Items whose sales are high should be stored in all local warehouses.

• B items: Items whose sales are not quite as strong should be stored in fewer, selected regional distribution warehouses.
• C items: Items whose sales are low should be stored only in the factory warehouse.

• D items: Items whose share of sales is very low should not be stored at all and should only be made to order.

Here, too, the critical value of an item should be considered, as this can alter the ABCD classifications. Moreover, an analysis should be done into the extent that top-selling and low-selling items are bought by the same customers.