29*

Always better control

An analysis of a range of items that have different levels of significance and should be handled or controlled differently.

ABC analysis is an inventory categorization method which consists in dividing items into
three categories (A, B, C): A being the most valuable items, C being the least valuable ones.
This method aims to draw managers' attention on the critical few (A-items)
A items: very tight control and accurate records; B items: less tightly controlled and good
records; C items: simplest controls possible and minimal records.

It is also known as "Selective Inventory 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

ABC Classification of Inventory Items

A items : 70% of the annual consumption of inventory is covered by only 10% of the items
in the inventory, deserve highest attention

6. B items : 20% of the items covering 20 % of the inventory investment(less stringent

control)

7. C items : rest 70% of the inventory items (very little control).

. Policies for A group items

Develop class A suppliers more

9. Forecast A items more carefully

10. Purchasing department make maximum efforts to expedite and delivery of these
items

11. Purchase of these items in hands of top officials

12. The stock report of A items should be sent more frequently, say at least once in 15

days.
Policies for B group items
o
o

Order quantities, re-order stocks and safety stock should be fixed and
revised for B items at least one in every 4 to 6 months.
14. B items should be ordered less frequently than A items

8
Policies for C group items
o
o
o

Large quantities can be brought at a time, as total investment will be

least.
15. Paper work can be reduced considerably if orders are placed once
or twice a year.
16. The source of supply can be one or two based on their reliability.

A = very important or urgent,

B = important or urgent
C = less important or urgent.

The ABC concept is derived from the Pareto's 80/20 rule curve. It is also
known as the 80-20 concept.

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 consumption

'A' class items are closely monitored because of the value involved (70-80% !).

20% of the items account for 80% of total inventory consumption value (Qty
consumed X unit rate)

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.