ABC Classification / Analysis of Inventory

 

The ABC classification process is an analysis of a range of objects, such as finished products ,items lying in inventory or customers into three categories. It's 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 :

 

A - outstandingly important; B - of average importance; C - relatively unimportant as a basis for a control scheme. Each category can and sometimes should be handled in a different way, with more attention being devoted to category A, less to B, and still less to C.

Popularly known as the "80/20" rule ABC concept is applied to inventory management as a rule-of-thumb. It says that about 80% of the Rupee value, consumption wise, of an inventory

remains in about 20% of the items.

This rule , in general , applies well and is frequently used by inventory managers to put their efforts where greatest benefits , in terms of cost reduction as well as maintaining a smooth availability of stock, are attained.

The ABC concept is derived from the Pareto's 80/20 rule curve. It is also known as the 80-20 concept. Here, Rupee / Dollar value of each individual inventory item is calculated on annual consumption basis.


Thus, applied in the context of inventory, it's a determination of the relative ratios between the number of items and the currency value of the items purchased / consumed on a repetitive basis :

  • 10-20% of the items ('A' class) account for 70-80% of the consumption

  • the next 15-25% ('B' class) account for 10-20% of the consumption and

  • the balance 65-75% ('C' class) account for 5-10% of the consumption

'A' class items are closely monitored because of the value involved (70-80% !).

High value (A), Low value (C) , intermediary value (B)
 

  • 20% of the items account for 80% of total inventory consumption value (Qty consumed X unit rate)

  • Specific items on which efforts can be concentrated profitably

  • Provides a sound basis on which to allocate funds and time

  • A,B & C , all have a purchasing / storage policy - "A", most critically reviewed , "B" little less while "C" still less with greater results.

 

ABC Analysis is the basis for material management processes and helps define how stock is managed. It can form the basis of various activity including leading plans on alternative stocking arrangements (consignment stock), reorder calculations and can help determine at what intervals inventory checks are carried out (for example A class items may be required to be checked more frequently than c class stores

Inventory Control Application:
The ABC classification system is to grouping items according to annual issue value, (in terms of money), in an attempt to identify the small number of items that will account for most of the issue value and that are the most important ones to control for effective inventory management. The emphasis is on putting effort where it will have the most effect.

All the items of inventories are put in three categories, as below :

 

A Items : These Items are seen to be of high Rupee consumption volume. "A" items usually include 10-20% of all inventory items, and account for 50-60% of the total Rupee consumption volume.

B Items : "B" items are those that are 30-40% of all inventory items, and account for 30-40% of the total Rupee consumption volume of the inventory. These are important, but not critical, and don't  pose sourcing difficulties.

C Items : "C" items account for 40-50% of all inventory items, but only 5-10% of the total 

Rupee consumption volume. Characteristically, these are standard, low-cost and readily available items. ABC classifications allow the inventory manager to assign priorities for inventory control. Strict control needs to be kept on A and B items, with preferably low safety stock level. Taking a lenient view, the C class items can be maintained with looser control and  with high safety stock level. The ABC concept puts emphasis on the fact  that every item of inventory is critical and has the potential of affecting ,adversely, production, or sales to a customer or operations. The categorization helps in better  control on A and B items.

In addition to other management procedures, ABC classifications can be used to design cycle counting schemes. For example, A items may be counted 3 times per year, B items 1 to 2 times, and C items only once, or not at all.

Suggested policy guidelines for A , B & C classes of items

A items (High cons. Val)        B items (Moderate cons.Val)          C item (Low cons. Val)
 
Very strict cons. control     Moderate control Loose control
No or very low safety stock Low safety stock High safety stock
Phased delivery (Weekly) Once in three months Once in 6 months
Weekly control report Monthly control report Quarterly report
Maximum follow up Periodic follow up Exceptional
As many sources as possible Two or more reliable Two reliable
Accurate forecasts Estimates on past data Rough estimate
Central purchasing /storage Combination purchasing Decentralised
Max.efforts to control LT Moderate Min.clerical efforts
To be handled by Sr.officers Middle level  Can be delegated
     
 

 

 

                                  

Do you know ...........

'A' class items are also usually 'Fast Moving' items of inventory?
                       And
'C' class items are also usually 'Slow / Non Moving' items of inventory ?
For effective management, you need to classify 'A' items into further A1, A2 classes for better identification of and control on 'A' class inventory as also on B1,B2 of B class items as some of them need more focus than other B class items.  

Finally, ABC Analysis is an intrinsic part of Materials Management and is the categorization of products into groups sorted by their spend volume. Given Pareto analysis a typical ABC analysis might find that 20% of a products equate for 70% of the value, these are termed As and are the more expensive group (often comprised of complex assets) . Cheap consumable (and often easily replaceable items) fall into the C class.
 

How to do ABC Analysis ? Learn here....

                                                                                                 

 

 

 

 

 

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