System Modules
Inventory ABC Analysis
Purpose of the ABC Analysis:
Control of inventory is exercised by controlling individual items. In controlling inventory, four questions must be answered:
1. What is the importance of the inventory item?
2. How are they to be controlled?
3. How much should be ordered at one time?
4. When should an order be placed?
The ABC inventory classification system answers the first two questions by determining the importance of items and thus allowing different levels of control based on the relative importance of items.
Most companies carry a large number of items in stock. To have better control at a reasonable cost, it is helpful to classify the items according to their importance. Usually this is based on annual dollar usage, but other criteria may be used.
The ABC principle is based on the observation that a small number of items often dominate the results achieved in any situation. It is often found that the relationship between the percentage of items and the percentage of annual dollar usage follows a pattern in which:
A – About 20% of the items account for about 80% of the dollar usage.
B – About 30% of the items account for about 15% of the dollar usage.
C – About 50% of the items account for about 5% of the dollar usage.
Steps in Making an ABC Analysis:
1. Establish the item characteristics that influence the results of inventory management. This is usually annual dollar usage but may be other criteria, such as scarcity of material.
2. Classify items into groups based on the established criteria.
3. Apply a degree of control in proportion to the importance of the group.