ABC analysis is a business term used to define an inventory categorization technique often used in materials management. It is also known as Selective Inventory Control.
ABC analysis provides a mechanism for identifying items which will have a significant impact on overall inventory cost whilst also providing a mechanism for identifying different categories of stock that will require different management and controls
When carrying out an ABC analysis, inventory items are valued (item cost multiplied by quantity issued/consumed in period) with the results then ranked. The results are then grouped typically into three bands[3]. These bands are called ABC codes.
class “A” items constitute the most important class of inventories so far as the proportion in the total value of inventory .The “A” items consists of approximately 15% of the total items , accounts for 80% of the total material usage. This items merit a tightly controlled inventory system with constant attention to the purchase & stores management. A larger effort per item on only a few items will cost only moderately, but the effort can result in larger savings.
class “B” items constitute an intermediate position, which constitute approximately 35% of the total items, accounts for approximately 15% of the total material consumption. These items merit a formalized inventory system & periodic attention but the purchase & the stores management.
class “C” items are quite negligible. It consists remaining 50% items, accounting only 5% of the monetary value of total material usage . Quite relaxed inventory procedures are used.
Thus, applied in the context of inventory, it’s a determination of the relative ratios between the number of items and the currency value of the items purchased / consumed on a repetitive basis :
10-20% of the items (‘A’ class) account for 70-80% of the consumption
the next 15-25% (‘B’ class) account for 10-20% of the consumption and
the balance 65-75% (‘C’ class) account for 5-10% of the consum
ABC analysis is a vital method for control the Inventory.