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ABC analysis (also known as Pareto analysis) is a method of classifying inventory items based on their contribution to total sales revenue. [citation needed] This can be used to prioritize inventory management efforts and ensure that businesses are focusing on the most important items. [citation needed]
Correct sales forecasting– By analyzing sales data and inventory levels, the management improves sales forecasting. Cost reduction– ABC analysis allows the management to focus on products A which are more important. By doing so, the cost which could be spent on managing other items i.e B and C are saved.
where DII is days in inventory and COGS is cost of goods sold. The average inventory is the average of inventory levels at the beginning and end of an accounting period, and COGS/day is calculated by dividing the total cost of goods sold per year by the number of days in the accounting period, generally 365 days. [3]
In accounting, the inventory turnover is a measure of the number of times inventory is sold or used in a time period such as a year. It is calculated to see if a business has an excessive inventory in comparison to its sales level. The equation for inventory turnover equals the cost of goods sold divided by the average inventory.
Inventory analysis is one of the branches of Operation Research which deals in studying and understanding the stock/product mix combined with the knowledge of the demand for stock/product. It is the technique to determine the optimum level of inventory for a firm.
Inventory optimization refers to the techniques used by businesses to improve their oversight, control and management of inventory size and location across their extended supply network. [1] It has been observed within operations research that "every company has the challenge of matching its supply volume to customer demand.