A methodology for determining inventory levels based on value, space consumption, and turns.
ABC Inventory is also known as ABC analysis, it is a business term used to define an inventory categorization technique often used in materials management. It is also known as Selective Inventory Control. it stands for Always Better Control. Policies based on ABC analysis: A ITEMS: very tight control and accurate records B ITEMS: LESS TIGHTLY CONTROLLED and good records C ITEMS: simplest controls possible and minimal records
The ABC analysis provides a mechanism for identifying items that will have a significant impact on overall inventory cost, while also providing a mechanism for identifying different categories of stock that will require different management and controls.
The ABC analysis suggests that inventories of an organization are not of equal value. Thus, the inventory is grouped into three categories (A, B, and C) in order of their estimated importance.
'A' items are very important for an organization. Because of the high value of these 'A' items, frequent value analysis is required. In addition to that, an organization needs to choose an appropriate order pattern (e.g. 'Just- in- time') to avoid excess capacity.
'B' items are important, but of course less important, than 'A' items and more important than 'C' items. Therefore 'B' items are intergroup items.
'C' items are marginally important.
There are no fixed threshold for each class, different proportion can be applied based on objective and criteria. ABC Analysis is similar to the Pareto principle in that the 'A' items will typically account for a large proportion of the overall value but a small percentage of number of items.
Example of ABC class are
* 'A' items – 20% of the items accounts for 70% of the annual consumption value of the items.
* 'B' items - 30% of the items accounts for 25% of the annual consumption value of the items.
* 'C' items - 50% of the items accounts for 5% of the annual consumption value of the items.
Another recommended breakdown of ABC classes:
1. "A" approximately 10% of items or 66.6% of value
2. "B" approximately 20% of items or 23.3% of value
3. "C" approximately 70% of items or 10.1% of value