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Abc System

ABC Material System

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Aswathy Vimala Raj
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6 views

Abc System

ABC Material System

Uploaded by

Aswathy Vimala Raj
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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ABC analysis is a popular method in inventory management used to prioritize items based on

their importance to the business. The analysis is based on the Pareto principle, where a small
percentage of items typically account for the majority of value. Here's a breakdown of how ABC
analysis works, its purpose, and how it can be applied in inventory management practices:

What is ABC Analysis?

 A-class items: These are high-value items that make up a small percentage of the total
inventory but contribute to a large portion of the overall value (e.g., 70-80% of the value,
but only 10-20% of the items).
 B-class items: These are medium-value items that represent a moderate percentage of
both total inventory and total value (e.g., 15-25% of value and 30% of items).
 C-class items: These are low-value items that make up the majority of inventory but
contribute to a smaller portion of the total value (e.g., 5-10% of value, but 50-60% of the
items).

Purpose of ABC Analysis

1. Resource Allocation: Helps businesses allocate resources (time, money, and effort)
effectively by focusing on the most valuable inventory items.
2. Optimization: Reduces overstocking and understocking by setting different inventory
policies for A, B, and C items.
3. Decision-Making: Guides procurement, storage, and monitoring decisions to align with
business priorities.

Steps in ABC Analysis

1. Inventory Data Collection: Gather data on inventory items, including quantities and
their monetary value.
2. Calculate Annual Consumption Value:
o Annual Consumption Value=Unit Price×Annual Quantity Used\text{Annual
Consumption Value} = \text{Unit Price} \times \text{Annual Quantity
Used}Annual Consumption Value=Unit Price×Annual Quantity Used
3. Rank Inventory Items:
o Sort items by their annual consumption value in descending order.
4. Cumulative Analysis:
o Calculate the cumulative percentage of value and quantity for all items.
5. Classification:
o Divide items into A, B, and C categories based on their cumulative percentages.
ABC Inventory Policies

1. A-Class Items:
o Tight Control: Regular reviews and precise inventory tracking.
o Frequent Replenishment: Smaller, more frequent orders to avoid stockouts.
o Priority Management: High-level focus on supplier relationships.
2. B-Class Items:
o Moderate Control: Periodic reviews and batch ordering.
o Optimized Inventory Levels: Balance between order frequency and carrying
costs.
3. C-Class Items:
o Basic Monitoring: Simplified tracking and infrequent reviews.
o Bulk Ordering: Larger order sizes to minimize procurement efforts.

Advantages of ABC Analysis

 Efficient Use of Resources: Focuses on items that matter most.


 Improved Stock Levels: Avoids unnecessary investment in low-value items.
 Cost Savings: Reduces holding costs and stock obsolescence.

Limitations of ABC Analysis

 Subjectivity: Classification thresholds can vary by industry or company.


 Over-Simplification: May overlook critical items that don’t have high value but are
essential for operations.
 Dynamic Nature: Regular updates are required to maintain accuracy.

Example of ABC Analysis

Consider an inventory with the following data:

Item Unit Price Annual Quantity Annual Value Category


A $500 200 $100,000 A
B $50 1,000 $50,000 B
C $5 10,000 $50,000 C

Key Observation: Focus should be on managing A-class items more closely, while employing
simpler strategies for C-class items.

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