In materials management, the ABC analysis (or Selective Inventory Control) is an inventory categorization technique. ABC analysis divides an inventory into three categories-
"A items" with very tight control and accurate records,
"B items" with less tightly controlled and good records, and "
“C items" with the simplest controls possible and minimal records.
The ABC analysis provides a mechanism for identifying items that will have a significant impact on overall inventory cost, while also providing a mechanism for identifying different categories of stock that will require different management and controls.
The ABC analysis suggests that inventories of an organization are not of equal value. Thus, the inventory is grouped into three categories (A, B, and C) in order of their estimated importance.
'A' items are very important for an organization. Because of the high value of these 'A' items, frequent value analysis is required. In addition to that, an organization needs to choose an appropriate order pattern (e.g. ‘Just- in- time’) to avoid excess capacity. 'B' items are important, but of course less important than 'A' items and more important than 'C' items. Therefore 'B' items are intergroup items. 'C' items are marginally important.
ABC analysis categories
There are no fixed threshold for each class, different proportion can be applied based on objective and criteria. ABC Analysis is similar to the Pareto principle in that the 'A' items will typically account for a large proportion of the overall value but a small percentage of number of items.
Example of ABC class are
‘A’ items – 20% of the items accounts for 70% of the annual consumption value of the items
‘B’ items - 30% of the items accounts for 25% of the annual consumption value of the items.
‘C’ items - 50% of the items accounts for 5% of the annual consumption value of the items.
Another recommended breakdown of ABC classes:
"A" approximately 10% of items or 66.6% of value
"B" approximately 20% of items or 23.3% of value
"C" approximately 70% of items or 10.1% of value
Advantages of A.B.C. method of Inventory Control:
- It ensures control over the costly items in which a large amount of capital is invested.
- It helps in developing scientific method of controlling inventories. Clerical costs are considerably reduced and stock is maintained at optimum level.
- It helps in maintaining stock turnover rate at comparatively higher level through scientific control of inventories.
- It ensures considerable reduction in the storage expenses. It results in stock carrying stock.
- It helps in maintaining enough safety stock for C category of items. The following graph demonstrates ABC inventory classification
This analysis suffers from the following drawbacks:
- This technique can be successfully employed only, if there is proper standardisation of materials in the store.
- A good system of codification of materials should be in operation for the success of this analysis.
- The analysis is based on monetary value of the items in use. Other important factors one ignored.
In spite of the above mentioned limitations, the ABC analysis is very popular method of inventory control. It is an effective instrument in reducing the cost of materials in the store house.