ABC analysis, despite all its benefits for inventory maintenance and management, is not a one-size-fits-all inventory management solution. Every organization has specific customer demand patterns, classifications, systems and other issues that affect the usefulness of an ABC analysis.
The disadvantages of ABC analysis stem from two issues: an emphasis on the dollar value of inventory and the significant amount of time and discipline it takes to apply the method. Here are a few more challenges:
- Parameter Instability: ABC analysis often results in managers assigning up to 50% of items to a new category every quarter or year. Often, companies are not aware of the changes until there is a problem with demand, and the need to reassess may take up valuable time and jeopardize customer satisfaction.
- Limited Pattern Consideration: The standard ABC method will not account for factors like new product introductions or product seasonality. For example, a new product may have low sales volume because it has no buying history. ABC analysis has a somewhat static perspective on demand and will generate inventory inefficiencies whenever demand is shifting or unclear.
- Low Information Extraction: ABC class information may not provide all the statistical data or detail needed to make informed, strategic management decisions.
- High Resource Consumption: Giving disproportionate weight to trivial issues is known as bikeshedding, which can be an unfortunate consequence of ABC analysis. Since ABC analysis is easy to grasp, staff may inject their opinions or request their own variants making ABC analysis a resource-consuming process rather than a time-saving tool.
- Value Blindness: ABC analysis ascribes product importance based on revenue or frequency of use, but some items may not hold to this paradigm. For example, a retail display item may rarely sell but may attract a lot of customers (who will buy other products) based on its novelty. In aerospace, a specific part for a plane may not be used often and have little market value, but it may be a fundamental safety function.
- System Incompatibility: ABC inventory analysis conflicts with traditional costing systems and is out of compliance with generally accepted accounting principles (GAAP) requirements. If you must run multiple costing systems, labor costs will rise alongside inefficiency.
- Undersupply or Oversupply Issues: One ABC analysis disadvantage is it looks at dollar-based values, rather than the volume that cycles through inventory, so there is a risk of running out of Class B or C items. The opposite can occur, too. You may have excess low-class items that accumulate in inventory if you reorder them without regular reviews.
- Loss Risk: Just because B and C items do not have as high a value as Class A products does not mean they no value. One of the limitations of ABC analysis is that excess stocks are always in jeopardy of obsolescence or damage. Therefore, the inventory that habitually goes uncounted or unmonitored may be subject to theft.
- Mandatory Standardization: The ABC method is only successful if every item is subject to the standardization of materials, which includes how they are named, stored, and consistently rated and monitored.
- Arbitrary Categorization: Without preset boundaries or agreed-upon standards for each category, classifying goods depends on the manager’s professional judgment. So this can be a relatively subjective process.
- Business Limitations: ABC analysis is not useful for companies that have an equable annual consumption value of inventory items by type. For instance, a company that sells the same version of an item like candy, nails or socks, may not be able to sort stock based on the Pareto Principle.
- High Resource Consumption: Companies with a significant number of inventory items will have to hire additional staff or buy special equipment to control inventory using ABC categorization.