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A.B.C. Analysis (Always Better Control)

ABC analysis is an inventory management technique that categorizes items into three classes - A, B, and C - based on their annual consumption value. Class A items have the highest value and are given the most management attention, while Class C items have the lowest value and receive the least attention. This technique is based on the Pareto principle that 80% of consequences come from 20% of causes. ABC analysis helps businesses prioritize resources on the most important inventory in order to improve control and cycle counting efficiency. However, it may conflict with traditional accounting systems and require substantial resources to maintain classifications.

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Navin Nadar
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152 views

A.B.C. Analysis (Always Better Control)

ABC analysis is an inventory management technique that categorizes items into three classes - A, B, and C - based on their annual consumption value. Class A items have the highest value and are given the most management attention, while Class C items have the lowest value and receive the least attention. This technique is based on the Pareto principle that 80% of consequences come from 20% of causes. ABC analysis helps businesses prioritize resources on the most important inventory in order to improve control and cycle counting efficiency. However, it may conflict with traditional accounting systems and require substantial resources to maintain classifications.

Uploaded by

Navin Nadar
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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A.B.C.

Analysis (Always Better Control)


(ABC Analysis/ Pareto 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 part of the economy i.e. in any large group there are
“significant few” and “insignificant many”.
As I have discussed above, ABC analysis technique involves the classification of inventory items into
three categories A, B & C. This ABC analysis can be explained with the help of following Table-1 &
Table-2

Figure 1: Table-01
The annual consumption value is calculated by the formula: (Annual demand) × (item cost per unit)

Figure 2: Table-02
Both of the above tables demonstrate that a few high usage value items constitute a major part of the
capital invested in inventories, whereas bulk of items in inventory having low usage value constitute
insignificant part of capital
ABC analysis is used to simplify and organize your requirements.
For suppose Consider an Inventory as it is the most common place where it is applied in Supply Chain
perspective.
ABC analysis states that, in your Inventory
Class A items include all high revenue products, which typically account for about 80 percent of annual
sales ($) and represent about 20% of the inventory SKU's.
Class B items include all medium revenue products, which typically account for 15 percent of annual
sales ($) and represent about 30% of the Inventory SKU's.
Class C items include all low revenue products, which generally account for 5 percent of annual sales ($)
and represent about 50% of the Inventory SKU's.
The Percentage ratio applied for ABC categories is typical, but the quantities might vary according to
your requirements.
For Example: You can say that 80% of the warehouse space is occupied by 20% of the products for Class
A items and accordingly for Class B and Class C.
Hence, it is a general methodology to bifurcate your products to easily differentiate things.
Advantage: Better Control of High-Priority Inventory

ABC inventory analysis places tighter and more frequent controls on high-priority inventory. High-
priority inventory, or class A inventory, is the class of inventory that customers request most often. In
manufacturing, class A inventory also can include the items most often used in the production of goods.
Because Class A inventory is directly linked to the success of the company, it is important to constantly
monitor the demand for it and ensure stock levels match that demand.

With ABC analysis, your company can use its resources to prioritize control of high-priority inventory
over inventory that has a lower impact on your bottom line.

Advantage: More Efficient Cycle Counts

Under the ABC inventory analysis method, you can allocate your resources more efficiently during
cycle counts. A cycle count is the process of counting only certain items on scheduled dates. The
frequency of your cycle counts and the items you choose to include depend on how often your
inventory fluctuates.

Once inventory is organized by class, you can focus regular cycle counts on class A inventory.
Depending on your needs, it may be necessary to count class B inventory as infrequently as twice per
year and class C inventory only once per year. The ABC analysis method saves time and labor counting
only the inventory required by the cycle for the class of inventory versus counting all inventory items
each cycle.

Disadvantage: Conflict with Other Cost Systems

The ABC inventory analysis does not meet Generally Accepted Accounting Principles (GAAP)
requirements and also conflicts with traditional costing systems. If your business uses ABC methods it
must operate two costing systems, one for internal use under the ABC method and another for
compliance with GAAP. Traditional costing systems generate the figures required by GAAP.
Traditional costing systems allocate cost drivers by the actual unit cost, rather than by the activity
percentage of the cost driver. As a result, ABC cost assignments often differ from traditional cost
system assignments.

Disadvantage: Requires Substantial Resources

The ABC method requires more resources to maintain than traditional costing systems. When cycle
counts are performed, class A inventory must be routinely analyzed to determine if the inventory still
consists of high-priority items. If an inventory piece is no longer used or demanded as frequently, it is
moved to another inventory classification. This constant process requires much more data measurement
and collection.

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