ABC Analysis

sunandaC

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ABC Analysis is one of the selective inventory control techniques

ABC analysis is used to classify large data quantities.

It underlines a very important principle i.e,,"Vital few & Trivial many”.

“A” items are key to business whereas “B” and “C” are less significant in terms of cost.

ABC categorizes items on the basis of their annual usage.

The categorization helps to pay right amount of attention as merited by items.

“A” ITEMS :

Covers 5%-10% of Total Items and account for 70%-75% of Total Expenditure on materials.

This items require detail and rigid control and need to be stocked in smaller quantities.

This items should be procured frequently so that the inventory can be kept at minimum.

“B”- ITEMS :

These items are generally 10%-15% of total items and represent 10%-15% of total expenditure on materials.

These are intermediate items.

The control on these items need not to be as detailed as “A” and as rigid as “ C” items.

“C” – items :

These items numerous(as many as 70%-80% of total items)

These items are inexpensive items(represent hardly 5%-10% of total expenditure)

These items are insignificant(do not require close control)

The procurement policy is exactly reverse of “A” items.

These items are ordered in lot sizes.

IMPORTANT CONSIDERATIONS IN ABC ANALYSIS


ABC curve is similar in shape for different industries.

A company making more than one product should make only one ABC analysis for all the product s.

For e.g.”A” items in product-wise may become “C” items in total ABC analysis.

The selection of appropriate classification criteria is significant factor. For e.g., if analysis goal is Customer Sales Distribution the criteria should be Customer sales in relation to overall sales within a period.

Safety stock of “A” materials should be as small as possible.

Advantages of ABC analysis


By focusing on “A” category items the inventory costs can be reduced considerably.

The average inventory value can be kept constant by fixed ordering of “B” items.

In “C” category items two-bin system is used because of which there in no shortage of “c” category items.

Disadvantages of ABC analysis


Importance is given to an item based only on its annual consumption value.

It should be reviewed periodically so that changes in price and consumption are taken into account.
 
Definition of ABC analysis

According to Business Standards, An analysis of a range of items that have different levels of significance and should be handled or controlled differently. It is a form of Pareto analysis in which the items (such as activities, customers, documents, inventory items, sales territories) are grouped into three categories (A, B, and C) in order of their estimated importance. 'A' items are very important, 'B' items are important, 'C' items are marginally important.
 
ABC Analysis is one of the selective inventory control techniques

ABC analysis is used to classify large data quantities.

It underlines a very important principle i.e,,"Vital few & Trivial many”.

“A” items are key to business whereas “B” and “C” are less significant in terms of cost.

ABC categorizes items on the basis of their annual usage.

The categorization helps to pay right amount of attention as merited by items.

“A” ITEMS :

Covers 5%-10% of Total Items and account for 70%-75% of Total Expenditure on materials.

This items require detail and rigid control and need to be stocked in smaller quantities.

This items should be procured frequently so that the inventory can be kept at minimum.

“B”- ITEMS :

These items are generally 10%-15% of total items and represent 10%-15% of total expenditure on materials.

These are intermediate items.

The control on these items need not to be as detailed as “A” and as rigid as “ C” items.

“C” – items :

These items numerous(as many as 70%-80% of total items)

These items are inexpensive items(represent hardly 5%-10% of total expenditure)

These items are insignificant(do not require close control)

The procurement policy is exactly reverse of “A” items.

These items are ordered in lot sizes.

IMPORTANT CONSIDERATIONS IN ABC ANALYSIS


ABC curve is similar in shape for different industries.

A company making more than one product should make only one ABC analysis for all the product s.

For e.g.”A” items in product-wise may become “C” items in total ABC analysis.

The selection of appropriate classification criteria is significant factor. For e.g., if analysis goal is Customer Sales Distribution the criteria should be Customer sales in relation to overall sales within a period.

Safety stock of “A” materials should be as small as possible.

Advantages of ABC analysis


By focusing on “A” category items the inventory costs can be reduced considerably.

The average inventory value can be kept constant by fixed ordering of “B” items.

In “C” category items two-bin system is used because of which there in no shortage of “c” category items.

Disadvantages of ABC analysis


Importance is given to an item based only on its annual consumption value.

It should be reviewed periodically so that changes in price and consumption are taken into account.

Hey sunanda, thanks for sharing the article and i really liked it. Well, ABC analysis is an inventory labeling technique which comprises in splitting items into three groups (A, B, C): A being the most useful items, C being the minimum valuable ones. For more detailed information, please download my presentation.
 

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