A-B-C Analysis

The ABC inventory control technique is based on the principle that a small portion of the items may typically represent the bulk of money value of the total inventory used in the production process, while a relatively large number of items may from a small part of the money value of stores. The money value is ascertained by multiplying the quantity of material of each item by its unit price. According to this approach to inventory control high value items are more closely controlled than low value items. Each item of inventory is given A, B or C denomination depending upon the amount spent for that particular item. A or the highest value items should be under the tight control and under responsibility of the most experienced personnel, while C or the lowest value may be under simple physical control. It may also be clear with the help of the following examples: A items are 10% of the stock items 80% of the total inventory value B items are 25% of the stock items 15% of the total inventory value C items are 65% of the stock items 5 % of the total inventory value A items are high value, most critical type items that must be in stock. These items require strict inventory control , frequent reviews of the use and movement of these items. Since there are relatively few A items, controlling these inventory items is not difficult but it is very important to have stringent control as these involves huge amount. B items are of lesser critical than A items. These items require nominal inventory controls , occasional reviews of the use and movement. These items also should be controlled in a strict tracking method. By controlling the A and B items, you are controlling only about 35% of the total inventory items; but about 95% of the inventory costs. C items are the open bin issue items, where they make up about 65% of the total number of the items, but only about 5% of the inventory cost. It is a waste of time and energy to try to control the C items at the level as the A and B items. The monetary return will not justify the necessary labor to process the paperwork. To make the most effective use of ABC classifications, the analysis should be completed at least on an annual basis.