Dr.

Basma Ezzat
➢ ABC stands for “Always Better Control”

➢ It helps to control inventory with large number for items

➢ Itrationalizes the number of orders, number of items and

reduces the inventory
➢ Itclassifies the inventory into three categories of A, B
and C

➢ Classifyinginventory according to some measure of

importance and allocating control efforts accordingly.

➢ The ABC analysis is based on Pareto's law

➢ The most important items in the company
➢ Accounts for only 10 to 20% of the total inventory items
➢ Accounts 60 to 70% of the annual dollar value (which is
the highest value)
➢ Have very tight inventory control and accurate records
➢ Managed by the top management
➢ Less important items than category A
➢ More important items than category C
➢ Accounts for only 25 to 30% of the total inventory items
➢ Accounts 15 to 25% of the annual dollar value
➢ Have intermediate inventory control and good records
➢ Managed by middle level management
➢ Least important items in the company
➢ Accounts for only 45 to 50% of the total inventory
items
➢ Accounts 5 to 10% of the annual dollar value
➢ Have low inventory control and minimal records.
➢ Managed by low and middle level management
➢ toclassify vendors in terms of the key figure invoiced
amount
➢ to classify sales organizations with regard to the key
figure incoming order or material or the key figure invoiced
sales
➢ to classify materials according to the key figure usage value
➢ toclassify work centers in terms of the key figure scrap
quantity
➢ to classify object classes with regard to the key
figure breakdown duration
➢ toclassify vendors according to the key figure number of lots
not in order
➢ To make Opportunity assessment
➢ Step 1: Compute the annual usage value for every item in the sample by
multiplying the annual requirements by the cost per unit.
➢ Step 2: Arrange the items in descending order of the usage value calculated
above.
➢ Step 3: Compute percentage of annual usage value for every item by dividing
annual usage value on total annual usage value for all items.
➢ Step 4: Compute the cumulative percentage of annual usage value for every
item.
➢ Step 5: Classifying each item to the corresponding category according to
category percentage.
 Answer

item code Average Inventory Value ($/ % annual usage

annual usage value Cumulative % Class
# (Units) unit) value
1289 400 3.75 1500.0 44.5 44.49 A
2347 300 4.00 1200.0 35.6 80.08 A
2349 120 2.50 300.0 8.9 88.98 B
2363 75 1.50 112.5 3.3 92.32 C
2394 60 1.75 105.0 3.1 95.43 C
2395 30 2.00 60.0 1.8 97.21 C
7844 12 2.05 24.6 0.7 97.94 C
6782 20 1.15 23.0 0.7 98.62 C
9111 6 3.00 18.0 0.5 99.16 C
8210 8 1.80 14.4 0.4 99.58 C
8310 7 2.00 14 0.4 100.00 C
3371.5
➢ Other criteria than annual dollar volume may be used
✓ Anticipated engineering changes
✓ Delivery problems
✓ Quality problems
✓ High unit cost
➢ Policies employed may include
✓ More emphasis on supplier development for A items
✓ Tighter physical inventory control for A items
✓ More care in forecasting A items
➢ For the two questions use the following ratios:
➢Class A items represent 70% of the total dollar usage. Class B
items represent about 20% of the total dollar usage.