ABC analysis is a technique commonly used in stock control or management. This technique allows us to exercise varying degree of control over different items of stock based on the investment involved and the value.
Features of ABC analysis include the following:
- Divided normally into three(3) categories according to their importance in term of value and frequency of replenishment during a period
- The three(3) categories are:
- “A” category-consists only a small percent age namely #10% of total stock items handled by the stores but require heavy investment about 70% of inventory value because of their high prices and heavy requirement
- “B” category-consists #20% of the total items of material handled by stores. % of investment required is about 20% of the total investment in inventories
- “C” category-consists #70% of total stock items but may have about 10% of total inventory value
The rationale for putting up the various three major categories is:
For “A” category where the inventory items are more expensive, they can be controlled effectively by using a proper & regular system to ensure neither overstocking nor shortage. Fixing maximum, minimum and re-order level, determination of economic order quantities value after accounting for ordering and carrying costs, value analysis, standardization methodologies are deployed.
For “B” category where the sum involved is moderate, the same degree of control as applied in aforesaid “A” category of item is not warranted. The orders for the inventory items from this “B” category may be placed after reviewing their situation periodically.
For “C” category, there is urgency to exercise constant control. Orders from this category may be placed either half or on yearly basis. The objective is to economise on ordering and handling costs. [See article on what are really the cost impact of good inventory control.]