Table of Contents

Introduction to ABC analysis :

In materials management, the ABC analysis (or Selective Inventory Control) is an inventory categorization technique. ABC analysis divides an inventory into three categories- “A items” with very tight control and accurate records, “B items” with less tightly controlled and good records, and “C items” with the simplest controls possible and minimal records.

The ABC analysis provides a mechanism for identifying items that will have a significant impact on overall inventory cost, while also providing a mechanism for identifying different categories of stock that will require different management and controls.

The ABC analysis suggests that inventories of an organization are not of equal value. Thus, the inventory is grouped into three categories (A, B, and C) in order of their estimated importance.

‘A’ items are very important for an organization. Because of the high value of these ‘A’ items, frequent value analysis is required. In addition to that, an organization needs to choose an appropriate order pattern (e.g. ‘Just- in- time’) to avoid excess capacity. ‘B’ items are important, but of course less important than ‘A’ items and more important than ‘C’ items. Therefore ‘B’ items are inter group items. ‘C’ items are marginally important.

Various names of ABC analysis Or Similar Techniques.

ABC Analysis
Pereto Analysis
80/20 Rules
Vital Few,Trivel manys
VED Analysis

The ABC analysis

The ABC approach states that a company should rate items from A to C, basing its ratings on the following rules:

A-items are goods which annual consumption value is the highest; the top 70-80% of the annual consumption value of the company typically accounts for only 10-20% of total inventory items.
B-items are the inter class items, with a medium consumption value; those 15-25% of annual consumption value typically accounts for 30% of total inventory items.
C-items are, on the contrary, items with the lowest consumption value; the lower 5% of the annual consumption value typically accounts for 50% of total inventory items.

ABC analysis Calculation :

The annual consumption value is calculated with the

formula: (Annual demand) x (item cost per unit)

Through this categorization, the supply manager can identify inventory hot spots, and separate them from the rest of the items, especially those that are numerous but not that profitable.

Advantages of ABC Classification

This kind of categorization of inventory helps one manage the entire volume and assign relative priority to the right category. For Example A Class items are the high value items. Hence one is able to monitor the inventory of this category closely to ensure the inventory level is maintained at optimum levels for any excess inventory can have huge adverse impact in terms of overall value.
A Category Items: Helps one identify these stocks as high value items and ensure tight control in terms of process control,
physical security as well as audit frequency.
It helps the managers and inventory planners to maintain accurate records and draw management’s attention to the issue on hand to
facilitate instant decision-making.
B Category Items: These can be given second priority with lesser frequency of review and less tightly controls with adequate
documentation, audit controls in place.
C Category Items: Can be managed with basic and simple records. Inventory quantities can be larger with very few periodic reviews.

Disadvantages

Inventory Classification does not reflect the frequency of movement of SKU and hence can mislead controllers.
B & C Categories can often get neglected and pile in huge stocks or susceptible to loss, pilferage, slackness in record control etc.