ABC analysis is a business term used to define an inventory categorization technique often used in materials management. It is also known as Selective Inventory Control.
ABC analysis provides a mechanism for identifying items which will have a significant impact on overall inventory cost [1] whilst also providing a mechanism for identifying different categories of stock that will require different management and controls[2]
When carrying out an ABC analysis, inventory items are valued (item cost multiplied by quantity issued/consumed in period) with the results then ranked. The results are then grouped typically into three bands[3]. These bands are called ABC codes.
ABC codes
- "A class" inventory will typically contain items that account for 80% of total value, or 20% of total items.
- "B class" inventory will have around 15% of total value, or 30% of total items.
- "C class" inventory will account for the remaining 5%, or 50% of total items.
ABC Analysis is similar to the Pareto principle in that the "A class" group will typically account for a large proportion of the overall value but a small percentage of the overall volume of inventory.[4]
Another recommended breakdown of ABC classes[5]:
- "A" approximately 10% of items or 66.6% of value
- "B" approximately 20% of items or 23.3% of value
- "C" approximately 70% of items or 10.1% of value
References
- ^ Manufacturing planning and control systems for supply chain management By Thomas E. Vollmann
- ^ http://www.supplychainmechanic.com/?p=46 How to carry out an ABC analysis of inventory
- ^ Oracle E-Business Suite Manufacturing & Supply Chain Management By Bastin Gerald, Nigel King, Dan Natchek
- ^ Purchasing and Supply Chain Management By Kenneth Lysons, Brian Farrington
- ^ Best Practice in Inventory Management, by Tony Wild (2nd Ed., p. 40)
See also
Categories: Business terms | Supply chain management terms
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