In materials management, ABC Analysis (or Selective Stock 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 controlled and good records, and “C items” with the simplest possible controls and minimal records.
ABC analysis provides a mechanism for identifying items that will have a significant impact on the overall cost of inventory, while also providing a mechanism for identifying different categories of inventory that will require different management and controls.
ABC analysis suggests that an organization's inventories are not of equal value. Thus, the inventory is grouped into three categories ( A, B and C ) in order of estimated importance.
'A' items are very important for an organization. Due to the high value of these 'A' items, frequent value analysis is required. Furthermore, an organization needs to choose an appropriate ordering pattern (e.g. 'Just-in-time') to avoid overcapacity. 'B' items are important, but of course they are less important than 'A' items and more important than 'C' items. Therefore, 'B' items are intergroup items. 'C' items are marginally important.
ABC Analysis Chart
Various names for ABC analysis or similar techniques.
ABC Analysis
Pereto Analysis
80/20 Rules
Few vitals, many trips
VED Analysis
The ABC analysis
The ABC approach states that a company should classify items from A to C, basing its classifications on the following rules:
A items are goods whose annual consumption value is the highest; The top 70-80% of the company's annual consumption value typically represents only 10-20% of total inventory items.
B items are interclass items, with average consumption value; This 15-25% of the annual consumption value typically represents 30% of the total inventory items.
C items are, on the contrary, the items with the lowest consumption value; The bottom 5% of annual consumption value typically represents 50% of total inventory items.
ABC Analysis Table
ABC analysis calculation:
The value of annual consumption is calculated with the
Formula:(Annual demand) x (item cost per unit)
Through this categorization, the supply manager can identify critical inventory points and separate them from the rest of the items, especially those that are numerous but not as profitable.
Advantages of ABC classification
This type of inventory categorization helps you manage the entire volume and assign relative priority to the right category. For example, class A items are high-value items. Therefore, it is possible to closely monitor inventory in this category to ensure that the inventory level is maintained at optimal levels, as any excess inventory can have a huge adverse impact in terms of overall value.
Items from a category: Helps 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 inventory managers and planners maintain accurate records and draw management's attention to the issue at hand. facilitate instant decision making.
Category B items: These may receive second priority with less review frequency and less stringent controls with appropriate measures. documentation, audit controls in place.
Category C items: Can be managed with basic and simple records. Inventory quantities may be larger with few periodic reviews.
Disadvantages
Inventory classification does not reflect the frequency of SKU movement and therefore can mislead controllers.
Categories B and C can often be neglected and accumulate huge stocks or susceptible to loss, theft, neglect of records control, etc.
ABC Analysis Chart
ABC Analysis Table
