How to
do ABC Analysis / Classification ?
ABC
analysis is a basic supply chain technique, often
carried out by inventory controllers/materials managers,
and is the starting point in Inventory control.

ABC
classification is a system of
categorization, with similarities to Pareto
analysis and the method usually categorizes
inventory into three classes with each class
having a different management control
associated.
Although different criteria may be applied to
each category the typical method of “scoring” an
inventory item is that of annual consumption
value of said item (Qty consumed X Cost of item)
with the result then ranked and 

then scored
(A, B or C). Classification may be specific to the
industry but typically follows a 70%, 90%, 100%
banding in that A class items represent 70% of
the value, B class items fall between 70% and 90% of
the annual value with C class the remaining. In
practical terms the complex high cost materials
typically fall into the A class items, with the
consumable, low cost (and typically fast moving)
classed as C class.

How to carry out the actual
analysis ? 
Carrying out ABC analysis is a bit tricky
affair. What ultimately is done is to segregate all the
inventory items into three categories viz. A, B & C.
ABC analysis can be done for any given data that has
money value as the prime factor.
For example classification of pending suppliers'
bills, items
of an MRO or any type of inventory ,expenditure over
a period of time, customers with respect to
sale value etc.
Let us take a typical example of inventory which we want
to classify into A,B & C classes in respect to items.

Procedural steps :
1.First of all, collect all the data of the inventory and
calculate the consumption or sale value. For a Stores,
maintaining inventory, this shall be Quantity issued X
unit rate of an item, say x1. Similarly , get the values
for all the remaining items, say , x2,x3,x4....x100 in
the following way :


Slno.

Item 
Unit rate 
Consumption (Qty)
issued)

1 
x1 
10 
10 
2 
x2 
12 
10 
3 
x3 
15 
12 
4 
x4 
20 
5 
5 
x5 
30 
2 
6 
x6 
5 
100 
7 
x7 
4 
80 
8 
x8 
16 
12 
9 
x9 
13 
22 
10 
x10 
35 
6





2.Now,
arrange all the consumption values in ascending or
descending order of values. Let us assume we have
listed in descending order (starting with highest
consumption value item to lowest consumption value
item).
3.Create next column and start adding the cumulative
total of consumption value, starting from the top
and finishing with the last item as given in the
table below :

Consumption Value

Value in ascending
order 
Cumulative Value 
Item 
Class 
100 
60 
560 
x5
C 
120 
100 
1160 
x1
C

180 
100 
260 
x4
C

100 
120 
380 
x2
C 
60 
180 
560 
x3
C 
500 
192 
752 
x8 C 
320 
210 
962 
x10 B

192 
286 
1248 
x9 B 
286 
320 
1568 
x7 A 
210 
500 
2068 
x6 A





From
the last column it is clearly evident that the
bottom 20 % of items (x6 & x7) consume together
nearly 70% of value, upper 70% (x1,x2,x3,x4,x5,x8)
items consume only 20% value and the remaining 10%
items (x9) consume 10% value. Respectively, these
are A,B and C classes of items. 




What is ABC Analysis ? Learn
here.... 




