Inventory Classification: History and Example

Inventory Classification, as the name says, is classifying the products in an inventory as per their demands, value, the revenue they bring in, carrying costs, etc. This is more or less like ABC analysis, wherein the products in the inventory are segregated into three categories: Category A holds the 20% of the products that bring 80% of revenue to the business, Category B holds the 30% of the products that bring in 15% of revenue, and Category C holds the 50% of the products that bring in the remaining 5% revenue.

The below-mentioned reasons also help in segregating the products from an inventory:

Fast-moving – items that sell at a quick pace; sell as soon as they are manufactured/produced and moved in the warehouse

High-value – items that bring in the highest revenue, but sell infrequently

Hybrid – products that remain in between; sell moderately

For the very first time, in 1951, General Electric was the first company to experiment “Inventory Classification” in its warehouse with a process named ABC methodology. This was suggested by an expert employee named H. Ford Dickey, keeping in mind the sales volume, cumulative lead-time, cash flow or stockout costs, revenue, the value of the product, etc. Here, Category A comprises of all the items that had the highest impact on the company’s finances, while Category C comprised of the items that had the lowest impact.

For example, talking about a computer manufacturing line, the parts and software are all categorized as per their own importance…