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Lecture-V

ABC Analysis categorizes inventory into three groups: A (high value, 10% of items, 70% of value), B (medium value, 20% of items, 20% of value), and C (low value, 70% of items, 10% of value), with varying control policies. A items require tight control and frequent ordering, B items have moderate control, and C items are ordered less frequently with liberal safety stock. The analysis helps in materials management but has limitations, including not addressing all inventory control issues and not accounting for changes in item criticality.

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2 views

Lecture-V

ABC Analysis categorizes inventory into three groups: A (high value, 10% of items, 70% of value), B (medium value, 20% of items, 20% of value), and C (low value, 70% of items, 10% of value), with varying control policies. A items require tight control and frequent ordering, B items have moderate control, and C items are ordered less frequently with liberal safety stock. The analysis helps in materials management but has limitations, including not addressing all inventory control issues and not accounting for changes in item criticality.

Uploaded by

souravkartiksahoo
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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• ABC Analysis

• ABC means → Always Better Control


• ABC analysis divides inventories into three groupings in terms of percentage of number of items and percentage
of total value.
Group A – High usage valued items (important items)
Group B – Middle level items
Group C – Low usage valued items

• The inventory control is exercised on the principle of "management by exception" i.e., rigorous controls are
exercised on A items and routine loose controls for C items and moderate control in 'B' items. The items classified
by virtue of their uses as:

Catagory % of items (approx.) % value (approx.)


A. High valued items 10% 70%
B. Medium valued items 20% 20%
C. Low valued items 70% 10%
• Control policies for A items
'A' items are high valued items hence should be ordered in small quantities in order to reduce capital
blockage.
The future requirement must be planned in advanced so that required quantities arrive a little before
they are required for consumptions.
Purchase and stock control of A items should be taken care by top executives in purchasing department.
Maximum effort should be made to expedite the delivery.
The safety stock should be as less as possible (15 days or less).
'A' items are subjected to tight control w.r.t. Issue, Balance and Storing method
Ordering quantities, reorder point and maximum stock level should be revised more frequently.
• Control policies for ‘B' items
 The policies for 'B' items are in general between A & C.
 Order for these items must be placed less frequently.
 Safety stock should be medium (3 months or less).
 'B' items are subjected to moderate control.

• Control policies for 'C' items


 'C' items are low valued items.
 Safety stock should be liberal (3 months or more).
 Annual or 6 monthly order should be placed to reduce paper work & ordering cost and to get the advantage of
discount.
 In case of these items only routine check is required.
• Steps for ABC Analysis
Calculate the annual usage in units for each items.
Calculate the annual usage of each item in terms of rupees. (annual usage* unit cost)
Rank the items from highest annual usage in rupees to lowest annual usage in rupees.
Compute total rupees.
Find the % of high, medium and low valued items in terms of total value of items.
A graph can be plotted between % of items on X axis and % of total value of item on Y axis.
• Example
• Prepare ABC analysis on the following sample of items in an inventory.

Item Annual usage units Unit cost (Rs.) Annual usage (Rs.) Ranking
a 30000 0.01 300 6
b 2800 1.5 4200 1
c 300 0.10 30 9
d 1100 0.05 550 4
e 400 0.05 20 10
f 2200 1.00 2200 2
g 1500 0.05 75 8
h 8000 0.05 400 5
i 3000 0.30 900 3
j 800 0.10 80 7
• ABC analysis (ABC ranking)

Items Annual Usage Cumulative Cumulative Ranking Annual Cumulative


(Rs.) Amount Percent usage units %
b 4200 4200 47.97 A 2800 5.88
f 2200 6400 73.10 A 2200 9.98
i 900 7300 83.38 B 3000 15.97
d 550 7850 89.66 B 1100 18.16
h 400 8250 94.23 B 8000 34.13
a 300 8550 97.66 C 30000 94.01
j 80 8630 98.57 C 800 95.68
g 75 8705 99.43 C 1500 98.60
c 30 8735 99.77 C 300 99.20
e 20 8755 100 C 400 100
Applications of ABC analysis
• ABC analysis can be effectively used in materials management. Such as
 Controlling raw materials components.
 Controlling work in progress inventories.

Limitations of ABC analysis


1. ABC analysis does not consider all relevant problems of inventory control such as a firm handling adequately
low valued 'C' items.
2. ABC analysis is not periodically revised for which 'C' items like diesel oil in a firm will become most high valued
items during power crisis.
3. The importance of an item is computed based on its consumption value and not its criticality.

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