ABC INVENTORY CLASSIFICATION (SELECTIVE INVENTORY
CONTROL-SIC)
This is a popular inventory control technique, which is an adaptation of Pareto's Law. In a study of the distribution of wealth and income in Italy, Vilfredo Pareto, an Italian Economist, observed in 1897 that a very large percentage of the total national income and wealth was concentrated in the hands of a small percentage of the population. Believing that this reflected a universal principle, he formulated the axiom that the significant items in a given group normally constitute a small portion of the total items in the group and that majority of the items in the total will, in the aggregate, be of minor significance. Pareto expressed this empirical relationship mathematically. But, the rough pattern is 80 per cent of the distribution is accounted for by 20 per cent of the group membership.
The 80-20 pattern holds true in most inventory situations, where it can be shown that approximately 20 per cent of the items account for 80 per cent of total cost (unit cost times usage quantity). In the typical ABC-Classification, these are designated as A-items, and the remaining 80 per cent of the items become B's and C's, representing the 30 per cent that account for 15 per cent of cost, and the bottom 50 per cent that account for 5 per cent of cost. The idea behind ABC-Classification is to apply the bulk of the limited planning and control resources to the A-items, "where the money is", while, the expenses on the other classes that have demonstrably much less effect on the overall inventory investment, is kept to a minimum. The ABC control concept is implemented by controlling A-items "more tightly" than B and C items, in descending order.
Today, the principle of graduated control stringency may be somewhat difficult to comprehend, But, in pre-computer days the degree of control was equated with the frequency of reviews of a given inventory item's record. Controlling 'tightly' meant reviewing frequently. The frequency of review, in turn, tended to determine the order quantity. A-items would be reviewed frequently and ordered in small quantities, in order to keep inventory investment low. A typical ABC-classification, which is an acronym for "Always Better Control", is graphically represented below.
The rationale of ABC-classification is the impracticality of giving an equally high degree of attention to the record of every inventory item, due to limited information-processing capacity.
With computers now available, this limitation has disappeared and the ABC concept tends to become more or less irrelevant. Equal treatment