ABC Analysis

ABC Analysis provides a mechanism for identifying items that will have a significant impact on overall inventory cost Its an inventory categorization Technique Its is also known as Selective inventory control. Based on 80/20 Rule.

ABC Codes
A Class inventory will typically contain items that account for 80% of total value or 20% of total Items. B Class inventory will typically contain items that account for 15% of total value or 30% of total Items. C Class inventory will typically contain items that account for 5% of total value or 50% of total Items.

Steps of ABC Analysis

1. Determine the annual usage in units for each item for the past one-year. 2.Multiply the annual usage quantity with the average unit price of each item to calculate the annual usage in Rupees or value for each item. 3.Item with highest value is ranked first. Then the next lower annual usage item is listed till the lowest item is listed in the last. 4.Arrange the items in the inventory by cumulative annual usage (rupees) and by cumulative percentage. Categorize the items in A, B , and C categories.

EXAMPLE
Item No. 1 2 3 4 5 6 7 Particulars A B C D E F G TOTAL Annual Usage (Units) 100 80 90 70 125 110 50 Price/Unit 10 15 12 20 9 10 25 Total Value 1000 1200 1080 1400 1125 1100 1250 8155 Rank 7 3 6 1 4 5 2

Item No. 4 7 2 5 6 3 1

Particulars Total Value

Cumulative Annual Usage 1400 2650 3850 4975 6075 7155 8155

Annual Usage % 17% 32% 47% 61% 74% 87% 100%

Category Assigned A A A A A B C

D G B E F C A

1400 1250 1200 1125 1100 1080 1000

Limitations
Most of the time only past annual usage is available to perform an ABC analysis. By definition it is what was bought but not what will be the next years spend. The use of past annual spend is fine if the business needs will not change in the near future. The buyer may consider that next year figures will be the same as the last years one. In the case where the buyer considers that the future needs may vary from the past figures, it would be better, whenever available, to use future annual usage provided by the internal customers or budgeted figures.