Details

ABC Inventory Analysis

ABC INVENTORY ANALYSIS

Introduction to A.B.C.
ABC is a selective inventory control technique which stand for Always Better Control.
ABC analysis is a technique for prioritizing the management of inventory. Inventories are
categorized into three classes - A, B, and C. Most management efforts and oversights are
expended on managing A items. C items get the least attention and B items are in-between
(moderate).
All three refer to categorization of various items, products and services into three groups
depending upon their importance and significance so that their handling is done accordingly.

Explanation of A.B.C.
This ABC analysis is based on economic principle of economist Vilfredo Pareto which
state that most of the economic productivity comes from only a small parts of the economy
i.e. in any large group there are “significant few” and “insignificant many”.


Classification of items Under A.B.C.
Category ‘A’
Most valuable and costly items are classified under ‘A’ category. Such items have large
investment but not much in number. For example 10 percent of items account for 70 percent
of total invested in inventory. So, more careful and strict control is needed for such items.
This category will be the smallest category in quantity but largest in monetary terms.

Category ‘B’
Category ‘B’ represents the middle parts of products between Category ‘A’ and Category
‘C’. They are larger in number than category ‘A’ but smaller in monetary term. These items
having average consumption value. 20 percent of the item in an inventory account 20 percent
for total investment. These ‘B’ items have less importance than ‘A’, so moderate control is
needed for them.

Category ‘C’
The items placed under category ‘C’ have the lowest consumption value.But, nearly 70 percent
of inventory items account only for 10 percent of the total invested capital. So, these
are “trivial many” items which do not catch much strict management attention i.e. loose
control is needed for such items.

Why A.B.C. Analysis:
• Ensures control over the costly items.
• Reduction in the storage expenses.
• Resource allocation.
• Increased economy.

Limitation of A.B.C. Analysis:
• ABC Analysis does not permit precise consideration of all relevant problem of inventory
control.
• If ABC Analysis is not updated and reviewed periodically the real purpose of control
may be defeated.
• Periodical consumption value is the basis for ABS classification not unit value.