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How to do ABC Analysis / Classification ?

ABC analysis is a basic supply chain technique, often carried out by inventory controllers/materials managers, and is the starting point in Inventory control.

 

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). 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.
 

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 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.

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 :

 

Slno.  

Item

Unit rate

Consumption (Qty) issued)

1 x1 10   10
2 x2 12   10
3 x3 15   12
4 x4 20     5
5 x5 30     2
6 x6 5

100

7 x7 4   80
8 x8 16   12
9 x9 13   22
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 :
 
Consumption Value  Value in ascending order Cumulative Value Item Class
100 60 560 x5          C     
120 100 1160  x1           C      
180 100 260

x4           C             

100 120 380 x2        C    
60 180 560 x3         C     
500 192 752 x8   C
320 210 962 x10  B
192 286 1248 x9   B
286 320 1568 x7  A
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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What is ABC Analysis ? Learn here....

 
 
 

 

 

 

 

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