Scribd
Upload
207 views

ABC Analysis: Presentation by Dr. Neelabh Kumar

ABC analysis is a technique used to categorize inventory items into three classes - A, B and C - based on their relative annual usage value and cost. Class A items are few in number but account for the majority of total inventory cost, so they require tight control. Class C items are many in number but account for a small percentage of total cost, so they need less strict control. ABC analysis aims to rationalize inventory management by applying selective control measures based on item classification.

Uploaded by

Neelabh Kumar
Copyright
© © All Rights Reserved
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
207 views

ABC Analysis: Presentation by Dr. Neelabh Kumar

ABC analysis is a technique used to categorize inventory items into three classes - A, B and C - based on their relative annual usage value and cost. Class A items are few in number but account for the majority of total inventory cost, so they require tight control. Class C items are many in number but account for a small percentage of total cost, so they need less strict control. ABC analysis aims to rationalize inventory management by applying selective control measures based on item classification.

Uploaded by

Neelabh Kumar
Copyright
© © All Rights Reserved
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
You are on page 1/ 11

ABC Analysis

Presentation By
Dr. Neelabh Kumar
ABC ANALYSIS (ABC = Always Better
Control)
• ABC plan is based upon segregation of materials for selection control.
• It measures the money value, i.e., cost significance of each material
item in relation to total cost and material value.
• The study of each item of stock in terms of its usage, lead time,
technical or other problems and its relative money value in the total
investment in inventories.
• Critical, i.e., high value items deserve very close attention, and low
value items need to be devoted minimum expense and effort in the
task of controlling inventories.
• It helps to exercise selective control when confronted with large
number of items
• It rationalizes the number of orders, number of items & reduce the
inventory.
CLASSIFICATION
• In this technique, the items of inventory are classified according to the
value of usage.
• Materials are classified as A, B and C according to their value.

• Items in class ‘A’ constitute the most important class of inventories so far
as the proportion in the total value of inventory is concerned. The ‘A’ items
constitute roughly about 5-10% of the total items while its value may be
about 80% of the total value of the inventory.
• Items in class ‘B’ constitute intermediate position. These items may be
about 20-25% of the total items while the usage value may be about 15%
of the total value.
• Items in class ‘C’ are the most negligible in value, about 65-75% of the
total quantity but the value may be about 5% of the total usage value of
the inventory.
A’ ITEMS
‘Small in number, but consume large
amount of resources Must have:
• Tight control
• Rigid estimate of requirements
• Strict & closer watch
• Low safety stocks
• Managed by top management
‘C’ ITEMS
Larger in number, but consume lesser
amount of resources Must have:
• Ordinary control measures
• Purchase based on usage estimates
• High safety stocks
• Management can be fully delegated
ABC analysis does not stress on items those
are less costly but may be vital
‘B’ ITEM
Intermediate
• Must have:
• Moderate control
• Purchase based on rigid requirements
• Reasonably strict watch & control
• Moderate safety stocks
• Managed by middle level management
Steps in ABC Analysis
The important steps involved in segregating materials or inventory
control are:
1) Find out future use of each item of stock in terms of physical
quantities for the review forecast period.
2) Determine the price per unit for each item.
3) Determine the total project cost of each item by multiplying its
expected units to be used by the price per unit of such item.
4) Beginning with the item with the highest total cost, arrange different
items in order of their total cost as computed under step (iii) above.
5) Express the units of each item as a percentage of total costs of all
items.
6) Compute the total cost of each item as a percentage of total costs of
all items.
ADVANTAGES OF ABC ANALYSIS
 It ensures a closer and a more strict control over such
items, which are having a sizable investment in there.
 It releases working capital, which would otherwise have
been locked up for a more profitable channel of
investment.
 It reduces inventory-carrying cost.
 It enables the relaxation of control for the ‘C’ items and
thus makes it possible for a sufficient buffer stock to be
created.
 It enables the maintenance of high inventory turn over
rate.
DISADVANTAGES OF ABC ANALYSIS

 Proper standardization & codification of inventory


items needed
 Considers only money value of items & neglects the
importance of items for the production process or
assembly or functioning.
 Periodic review becomes difficult if only ABC
analysis is recalled.
 When other important factors make it obligatory to
concentrate on “C” items more, the purpose of ABC
analysis is defeated.

You might also like