ABC ANALYSIS (ALWAYS BETTER CONTROL)

Any organization usually deals with lots of items. It is very difficult to exercise control over all the items. Controlling means transactions related to inventory, degree of control, type of records to be maintained, lot sizes, frequency of review, size of safety stock to be maintained etc.
ABC analysis helps to classify the thousands or even millions of individual items into three groups namely items belonging to A group, B group, C group items respectively. ABC analysis is done based on the Pareto’s principle.
Consumption value is the basis for ABC classification. Consumption value is the product of unit price and consumption.

Read more : ABC Inventory analysis

## Mechanism of doing ABC classification:

Steps involved:
1. Collect previous year consumption and unit price for each item.
2. Multiply the consumption and unit price for each item to get the consumption value.
3. Rank the items corresponding to the consumption value.
4. Calculate cumulative consumption value against each item.
5. Find the percentage of cumulative consumption value.

Usually to classify the items into ‘A’ class there is leverage available. The leverage is 60 to 70 percentage of the consumption value.
This means the cut-off value can be fixed in between 60 to 70 percentage  of consumption and the corresponding items which contribute up to the cut-off value are classified as a class items.
Similarly, to classify the items into B class, there is a leverage of the consumption value to the extent of 10 to 20 percentage of the consumption value. To classify the items into C class, there is a leverage of the consumption value to the extent of 10 to 20 percentage of the consumption value.

Kinds of Control
Purpose of classifying the items into ABC is to control over each item. The degree of control required for A class is not same for B and C class items. The following table helps the material manager in the kind of control to be exercised on these items.