ABC – Align Strategy with Execution
Grab some coffee and consider how your SKUs and materials are currently getting ABC assignments. Then consider: “Where does my paycheck come from?” And Hubris replies: “I already know, I don’t need data.” ABC indicator exists because nesting the data in the system helps align supply chain execution with your business strategy.
Overview
In a prior life, we planned 3,500+ SKU/location combos at multiple DCs. Imagine you arrive at work to emails, vms, reports, new product intros, but must plan materials, and breathe a little. And process blanket edicts like “reduce inventory” and “increase OTD”. Recently, at a conference, an attendee said: “when COVID hit, we reduced inventory on all of our A items and got crushed when sales came back.” Imagine how much time and money was lost calling, emailing, and expediting.
But how can you prioritize? Pareto Profit Ranking by product. NOT category, not group. Product. If you are globally distributing from multiple locations – then you need Product and Location data – to understand the priority at that location. But this is hard! There is so much data. Yes and yes. But if you don’t know, how can anyone systematically understand what is important? Especially with so many items? The key is aligning people with priorities with a system.
ABC Indicator Details
ABC indicator is built in, by design, to SAP (and Oracle) material masters (central Master Data repository) and is nested many places for prioritizations. ABC indicator in SAP is field MARC-MAABC.
This is not a Cycle Count ABC rank – that is different and in a different field. Cycle Count ABC in SAP is field MARC-ABCIN and this is on a different tab – Plant data / stor. 1 – in the SAP material master.
But consider why you would set cycle count ABCs independent from profit ranking. Why put cycle count focus on items other than top profit items (except maybe top shrinkage items, by value). Here is a key question: what is your criteria / process for setting Cycle Count ABC rank?
ABC In Practice
The ABC indicator (MARC-MAABC – not the CC indicator) should be used in forecasting, planning, purchasing, and consider it for maintenance and capital. Wouldn’t you want to have the best maintenance on the assets that produce the majority of your profits? The primary purpose is to allow planners and buyers to filter reports and queries. Without this filtering, they will just swim through a pile of MRP messages, calls, emails, and vms guessing priorities.
Start with the MRP review process, note the tcode at the bottom, hover over the image. This is the Initial MD06 screen showing the selections (filters) for the reporting. ABC Indicator appears, so planners can directly review only A items, or B items…
In the MRP list, that follows from the MRP selections, there is an ABC Indicator column. The entire display can be modified to show the ABC Indicator column on the left, and you can set the default display to show it and sort the list by ABC Indicator.
In the MRP Material List display, if you click the Overview and go to the second tab, you’ll see that ABC Indicator appears there too. If you click through the tabs – you won’t find the Cycle Count Indicator without clicking through to the material master.
Determine ABC Rank
ABC indicator is set first for the finished good, by total profit by location. Calculate total profit by item by last period, last 3, last 6 et cetera. Consider another column that will show the item that appears the most in the top 10. Depends on seasonality and other factors that you’ll either identify or know. This is your sales profit (SP) ABC ranking.
Your ERP will have an entry. That is your Material Master (MM) ABC ranking.
Use your forecasts x profit (factor in price and future component purchasing price changes) for your Forecasted (F) ABC. Why? A new SKU replacement will have future profits, but will show no past profit. Without indicating to the organization a priority, you have no systematic hope of communicating the priority.
Use these 3 lists to discuss, coordinate, and create a new ABC to update your ABC indicator in the material master.
Why is ownership important? So when there is an issue, someone will know they are responsible and will act. If they are not present, the manager will know to step in.
Resilience and Supply Risk Mitigation
Now for resilience, use bills of material to find all associated components, all the way back to purchased items. This is data wrangling, but I’ll explain it. Create your BOM output table to show the FG and components, then include the Profit and ABC.FG1 Comp1 Fg1profit A
FG1 Comp2 Fg1profit A…
For setting component ABC ranking, “But we rank purchasing by spend!” That is common, but consider an association to the top profit finished good. If you rank by total spend, projected or historical, you run the risk of a backlog for a top profit item due to a label or some other low spend item. I don’t want to answer that phone call. Unfortunately, the backlog reason will likely be lack of, or poor ABC settings.
For at least the top profit SKU, the complete BOM and all components should have an A for the ABC field. This clearly indicates priority and communicates: “do not run out”. Put another way: check this first, before all else. There should never be a phone call, email, or discussion about an A item, ever, except to discuss excess. It should just be there ready to use or ship.
But what about the other components? The second FG in the profit list should likely have all A’s set for the ABC field for its components too. It depends on your portfolio of finished good SKUs. After that, the ranking might be related to the profit associated to each component.
Component Profit
“But we don’t sell components!” But a SKU has profit, and we linked SKUs to components – so we can associate that profit with the component. Earlier, I explained how to create a list showing the components with related FG profit. Turn this around so each component has the profit from the FG SKU. Every line, every component. Sum up the profit (some components will repeat) for each to show the potential profit lost if you run out of that component. Some of these will be low value / high availability but some could be a cheap, specialty metal numerically stamped tag that is custom ordered. Ask me how I know. Here is one better: the tag wasn’t even in the bill of materials.If you included vendor, now you have profit associated to a vendor / city / country / route / port(?). See what I did there?
Now you have a data set, aligned with the company priorities (profit!), that you can use to load ABC fields and drive activity, like supplier resilience and risk mitigation and dual sourcing, systematically.
But, notes? You can load notes in SAP. Vendor notes, component notes, PO notes, status notes… Join the notes with the materials. Ask us how. It’s easy.
ABCs also need subjective input. For components, consider setting ABC to A for items that are hard to find new vendors for, or that have long lead times. For Finished Good SKUs, sales or marketing might have opportunities to grow sales in a certain market – how would you communicate a need to have ‘extra’ inventory in preparation? ABCs. When you make changes, leverage date settings. You can use the Material Master, Additional Data area, on the Internal Comment tab and we’ll deliver the text via table STXL and add it to a report for you.
Additional Benefits
Properly setting the ABCs, and aligning from finished goods to components helps prioritize everything from forecasting, to vendor relations.Consider payments. A sticky situation exists when a key component comes from a vendor where the spend you have with that vendor is small. That component that is very important to you, might not be important to them at all. So if you happen to push out payments, and they push out dates – all of a sudden, you might not have that component.
What about contract renewals? If you beat up suppliers for key components too much – are they likely to want to prioritize you as a customer? Prioritize production, delivery, quality? When you are aligned on ABC – everyone can see it internally, and treat the items more carefully.
For sales, for performance and status reporting, you can also separate A items to monitor them more closely, ensuring higher OTD and increase inventory and forecasts. This is why you set them as A items – so they get more attention.
Implement From Sales To Purchasing
When you complete the analysis, and review the special items, either have the planners load them, or do a mass update with MM17 for the items with certainty. Remember to do this by item, by plant – because the top seller, top profit item at one plant, is not necessarily the same at another plant. Another reason to extend the ABC setting A for the top profit item is because some plants supply components. If they did an internal ranking on the ‘profit’ of their ‘sold’ items, it might not put components for the top profit item at the top of that list = their priorities will not align to support the top profit Finished Good SKU.
SAP Customization For ABC Indicator
If you need to create or alter your ABC entries, here is how you can do it. Or send this to the person with access so they know exactly how to do it. They will need to access tcode SPRO and go to the SAP Reference Image. Depending on your governance and compliance guard rails, this might need to be done in a dev system then transported into production.
In the Change View, you can add new entries, so if you detail a process and see a benefit from adding more entries, add some – thoughtfully.
These changes should be easily seen in the material master in tcode MM03 and the other places shown above in tcode MD06.
ABC indicators, when assigned carefully and reviewed regularly, create confidence, autonomy, and stability for planning and purchasing to support the organization and its strategy.
Why profit? Because it answers “Where does my paycheck come from?” Or put another way, how do we maximize cash… Contact us and we’ll help you start within a week.
