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ABC
analysis is a basic supply chain technique, often
carried out by inventory controllers/materials managers,
and is the starting point in Inventory control.
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ABC
classification is a system of
categorization, with similarities to Pareto
analysis and the method usually categorizes
inventory into three classes with each class
having a different management control
associated.
Although different criteria may be applied to
each category the typical method of “scoring”
an inventory item is that of annual
consumption value of said item (Qty consumed X
Cost of item) with the result then ranked and
then scored (A, B or C). |
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Classification may
be specific to the industry but typically
follows a 70%, 90%, 100% banding in that A class items represent 70% of the
value, B class items fall between 70% and 90%
of the annual value with C class the
remaining. In practical terms
the complex high cost materials typically fall
into the A class items, with the consumable,
low cost (and typically fast moving) classed
as C class. |
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How to carry out the actual
analysis ?
Carrying out ABC analysis is a bit tricky
affair. What ultimately is done is to segregate all the
inventory items into three categories viz. A, B & C.
ABC analysis can be done for any given data that has
money value as the prime factor.
For example
classification of pending suppliers' bills, items of an MRO
or any type of inventory ,expenditure over a period
of time, customers with respect to
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sale value etc.
Let us take a typical example of inventory which we want
to classify into A,B & C classes in respect to items. |
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Procedural steps :
1.First of all, collect all the data of the inventory and
calculate the consumption or sale value. For a Stores,
maintaining inventory, this shall be Quantity issued X
unit rate of an item, say x1. Similarly , get the values
for all the remaining items, say , x2,x3,x4....x100 in
the following way : |
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Slno.
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Item |
Unit rate |
Consumption (Qty)
issued)
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1 |
x1 |
10 |
10 |
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2 |
x2 |
12 |
10 |
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3 |
x3 |
15 |
12 |
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4 |
x4 |
20 |
5 |
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5 |
x5 |
30 |
2 |
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6 |
x6 |
5 |
100 |
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7 |
x7 |
4 |
80 |
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8 |
x8 |
16 |
12 |
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9 |
x9 |
13 |
22 |
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10 |
x10 |
35 |
6
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2.Now,
arrange all the consumption values in ascending or
descending order of values. Let us assume we have
listed in descending order (starting with highest
consumption value item to lowest consumption value
item).
3.Create next column and start adding the cumulative
total of consumption value, starting from the top
and finishing with the last item as given in the
table below : |
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Consumption Value
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Value in ascending
order |
Cumulative Value |
Item |
Class |
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100 |
60 |
560 |
x5
C |
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120 |
100 |
1160 |
x1
C
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180 |
100 |
260 |
x4
C
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100 |
120 |
380 |
x2
C |
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60 |
180 |
560 |
x3
C |
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500 |
192 |
752 |
x8 C |
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320 |
210 |
962 |
x10 B
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192 |
286 |
1248 |
x9 B |
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286 |
320 |
1568 |
x7 A |
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210 |
500 |
2068 |
x6 A
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From
the last column it is clearly evident that the
bottom 20 % of items (x6 & x7) consume together
nearly 70% of value, upper 70% (x1,x2,x3,x4,x5,x8)
items consume only 20% value and the remaining 10%
items (x9) consume 10% value. Respectively, these
are A,B and C classes of items. |
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This
Classification can be done any time during a
Financial year but since control is to be exercised
,this exercise is usully done at the end of the
Financial year so that suitable policies are drawn
for A,B & C class items for the next financial year
and are really followed. |
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What is ABC Analysis ? Learn
here.... |
