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ABC Analysis

ABC analysis categorizes inventory items into three groups based on their value and consumption. Group A items have the highest value and consumption, group B items have moderate value and consumption, and group C items have low value and consumption. This allows managers to focus controls and efforts primarily on the important and expensive group A items, with less stringent controls on groups B and C. The goal is to exercise selective control over large numbers of inventory items.

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Husne Wares
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254 views

ABC Analysis

ABC analysis categorizes inventory items into three groups based on their value and consumption. Group A items have the highest value and consumption, group B items have moderate value and consumption, and group C items have low value and consumption. This allows managers to focus controls and efforts primarily on the important and expensive group A items, with less stringent controls on groups B and C. The goal is to exercise selective control over large numbers of inventory items.

Uploaded by

Husne Wares
Copyright
© Attribution Non-Commercial (BY-NC)
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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PURPOSE OF ABC ANALYSIS:

Normally, once ABC analysis has been done, the following broad policy

guidelines can be established in respect of each category: SL. NO. A-items: High consumption value B-
items: Moderate value C-items: Low consumption value

1. Very strict control Moderate control Loose control

2. No safety stocks Low safety stocks High safety stocks

3. Frequent ordering or weekly deliveries Once in three months Bulk ordering once in a 6 month

4. Weekly control statements Monthly control reports Quarterly control reports

5. Maximum follow-up and expediting Periodic follow-up Follow-up and expediting in exceptional cases

6. Rigorous value analysis Moderate value analysis Minimum value analysis

7. As many sources as possible for each item Two or more reliable sources Two reliable sources for each
item

8. Accurate forecasts in material planning Estimate based onpast data on presentplansRough estimate
for planning

9. Minimization of waste, obsolete and surplus Quarterly control over surplus and obsolete items Annual
review oversurplus and obsoletematerial

10.Individual posting Small group posting Group posting

11.Central purchasing and storage Combination purchasing Decentralized purchasing

12.Maximum efforts to reduce lead time Moderate Minimum clerical efforts

13.Must be handled by senior officers Can be handled by middle management Can be fully delegated

Color coding can be used to identify A, B and C categories in stores. Usually red is used for ‘A’ items, pink
is used for ‘B’ items and blue for ‘C’ items

ADVANTAGES OF ABC ANALYSIS

This approach helps the material manager to exercise selective control and focus his attention only on a
few items when he is confronted with lakhs of stores items. By concentrating on ‘A’ class items, the
material manager is able to control inventories and show visible results in a short span of time. By
controlling the ‘A’ items, and doing a proper inventory analysis, obsolete stocks are automatically
pinpointed. Many organizations have claimed that ABC analysis has helped in reducing the clerical costs
and resulted in better planning and improved inventory turnover. ABC analysis has to be resorted to
because equal attention to ‘A’, ‘B’ and ‘C’ items will not be worthwhile and would be very expensive.
Concentrating on all the items is likely to have a diffused effect on all the items, irrespective of the
priorities.

OBJECTIVE OF ABC ANALYSIS

As discussed earlier, the ABC analysis enables the material manager to exercise selective control when
he is confronted with a large number of items. Tighter and accurate procedures are essential for ‘A’
value items relating to material planning, forecasts, ordering, review, records, postings, revisions, lead
time analysis, safety stock, material consumption control, purchase budget, delivery schedule, value
analysis, follow-up, clerical efforts, physical stock verification, receipts, issues, stores accounting and
inspection. The degree control should be rigorous for ‘A’ items and should be minimum for ‘C’ items.

ABC analysis is also helpful to rationalize the number of orders and reduce the overall inventory. For
instance, let us consider three items P, Q, R have been used and their consumption is Rs. 2,40,000, Rs
24,000 and Rs. 2400 respectively. Let us presume that ABC classification is not done and annual orders
are 12 in number. Each item will be ordered 4 times and average inventory will be:

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