ABC analysis

What is INVENTORY ?

The term INVENTORY is defined as “the

systematic control and regulation of purchase, storage
and usage of materials in such a way so as to maintain an
even flow of production and at the same time avoiding
excessive investment in inventories.”
 What is ABC analysis?
(ABC = Always Better Control)
‡This is based on cost criteria.
‡
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.
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About 10 % of materials consume 70 % of resources
‡
About 20 % of materials consume 20 % of resources
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About 70 % of materials consume 10 % of resources
 “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

 “B” ITEMS
‡
Intermediate
‡
Must have:

Moderate control

Purchase based on rigid requirements

Reasonably strict watch & control

Moderate safety stocks

Managed by middle level 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

‡
ABC analysis does not stress on items those are less costly but may be vital
Percentage of cost

Percentage of items
 6
6- steps used to perform an ABC analysis
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1st step Identify the objective and the analysis criterion.
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2nd step Collect data about the analyzed population.
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3rd step Sort out the list by decreasing impact.
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4th step Calculate the accumulated impact and the percentage.
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5th step Identify the classes.
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6th step Analyze the classes and take appropriate decisions.
 Examples :-
- In shoes leather forms A grade materials , sole forms B grade materials
and shoe lace forms C grade materials, this is ABC analysis in inventory
management
-ABC Analysis in Medical Stores Inventory Control Background: The
basic principle of inventory control is ABC based on cost criteria . Methods:
Based on ABC matrix, economic analysis of drug expenditure of priced
vocabulary of medical stores (PVMS) section 01 for the year 2003 of a 190
bedded service hospital was under taken. Result: Out of 493 drugs in PVMS
section 01, only 325 drugs were being used in the reference hospital. The
total cost of drugs used was Rupees 55,23,503 . Of these 325 drugs,
47(14.4%) drugs were Category A , consuming 70% of total expenditure, 73
(22.46 %) drugs Category B consuming 20% and rest 205 drugs (63.7%)
Category C drugs cost only 10% of expenditure.
 When & Why to use it ?

The ABC analysis can be also be useful in several steps of the Sourcing
Value Chain:! Demand Identification, to gather the annual spend of a site!
Demand Aggregation, to gather the annual spend of several sites!
Opportunity Assessment, to identify leveraging opportunities.
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The ABC tool is used to identify the vital few from the trivial many,
according to a defined set of criteria.
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Different decisions may be taken from the result of the ABC analysis.
 Disadvantage of ABC

It gets harder to do correctly the longer you do

them.

Needs to be completed in the moment for the

most accuracy.

Still might reflect the biases of the data collector.

 CONCLUSION

At last I conclude that ABC analysis is a vital

method for control the Inventory.
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