ABCD Stratification

Let's assume that we have two items. One item cost 10K and other one cost $10. Also, let's assume that both items have high coefficient of variation that means both items are critical items. In this situation it makes sense to prioritize and  investigate root cause for high volatility for expensive item rather than cheap one .

When you are managing hundreds of item then it might be difficult to identify those items, which are expensive and highly volatile and need immediate attention. On this blog i will show you how to mathematically identify items that need immediate attention. The kind of items that need immediate attention are those items that have not only high CV but also are expensive. As i have showed you earlier how to calculate CV, on this blog i will show you how to identify items that can create panic.

ABCD Stratification : ABCD Stratification method categorize items into A,B,C, and D based on weighted percentage of item cost (For our example purpose we are using items cost. Otherwise It could be anything like inventory cost, Average selling price,  or Billing Unit).

Note that Item that has high CV and fall under "A" category should be given high priority.

Here is how we calculate ABCD. Note that you should calculate ABCD for entire product lines.

1. Sort cost (Qty) in descending Order

2. Calculate Total Qty

3. Divide each cost by total Qty (Calculate Weight)

4. Do cumulative sum of  weight (You will need to do cumulative sum on the result from step 3)

5. For our example purpose, if cumulative sum is less than 80% then we will consider as A item. If cumulative sum is between .80 and .95 then we will consider as B item. If cumulative sum is between .95 and .99 then we will consider as C item and rest would be D items.

You will notice that items that fall under "A" have high Qty. If an item has high CV and falls under category A then you should give high priority to that item.