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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
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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
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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. |
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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 :
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10-20% of the items ('A' class)
account for 70-80% of the
consumption
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the next 15-25% ('B' class)
account for 10-20% of the
consumption and
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the balance 65-75% ('C' class)
account for 5-10% of the consumption
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'A' class items are closely
monitored because of the value involved (70-80%
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High
value (A), Low value (C) , intermediary value
(B)
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20% of the items account for 80% of total
inventory consumption value (Qty consumed X unit
rate)
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Specific items on which efforts can be
concentrated profitably
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Provides a sound basis on which to allocate
funds and time
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A,B & C , all have a purchasing / storage policy
- "A", most critically reviewed , "B" little less
while "C" still less with greater results.
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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 : |
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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.
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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.
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Suggested
policy guidelines for A , B & C classes of items
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A items (High cons. Val)
B items (Moderate cons.Val)
C item (Low cons. Val) |
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Very strict cons. control |
Moderate control |
Loose control |
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No or very low safety stock |
Low safety stock |
High safety stock |
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Phased delivery (Weekly) |
Once in three months |
Once in 6 months |
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Weekly control report |
Monthly control report |
Quarterly report |
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Maximum follow up |
Periodic follow up |
Exceptional |
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As many sources as possible |
Two or more reliable |
Two reliable |
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Accurate forecasts |
Estimates on past data |
Rough estimate |
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Central purchasing /storage |
Combination purchasing |
Decentralised |
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Max.efforts to control LT |
Moderate |
Min.clerical efforts |
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To be handled by Sr.officers |
Middle level |
Can be delegated |
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'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. |
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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 A’s and are the more
expensive group (often comprised of complex assets) .
Cheap consumable (and often easily replaceable items) fall
into the “C” class.
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