ABC Analysis in Inventory 

Management
Posted by Dylan Wan on March 11, 2008

 I did some study on the ABC Analysis in Inventory Management.  It is also useful in business
analytics.  I will cover what it is and how it is supported in various ERPs. Finally, how it may be
used in analytics application.

What is ABC Analysis in Inventory Management?

Here is the link to the definition in wikipedia – ABC analysis.

Some people may confuse this with activity based costing, which is also called ABC. However,
in the inventory management area, ABC analysis refers to categorizing the stock according to
their cost and quantity.

Not all stock is equally valuable and therefore doesn’t require the same management focus. The
results of the ABC analysis provide information that helps evaluate how each inventory part
should be monitored and controlled. [1]

ABC category for an inventory item is derived based on its cost and quantity. You cannot say
that an item is always a class A item or a class B item. The category of an inventory item can
change over time. An inventory management system should be able to based on the information
available and periodically update the ABC assignment.

ABC Analysis in ERP

ABC Analysis is provided in the Inventory Management module of major ERPs:

1. J.D. Edwards can generate an ABC Analysis report based on an item’s total sales, gross
margin, or on-hand value. The ABC Analysis report ranks inventory items with a letter grade of
A, B, or C (where A represents the items with highest total sales, largest gross margin, or largest
on-hand value). You can also use different ranking percentages in each category. For example,
the system could rank Item A based on percentage of sales and Item C based on gross margin.

2. Oracle E-Business Suite support the ABC Analysis. You can run the ABC Compile process
for an Inventory organization or for a subinventory. It supports multiple Compile Criterions,
such as Current on–hand Quantity, Current on–hand value, Historical usage value, Forecasted
usage value, etc. The result can be used to drive the cycle counts, where you might count items
of high value (A items) very
frequently, items of lower value less frequently, and items of lowest value very infrequently.

3. PeopleSoft supports ABC analysis via its Utilization Types.  A “Utilization Type” is an ABC
category.  It also supports multiple “Calculation Rule”: On Hand Quantity, On Hand Amount,
Forecasted Amount, Forecasted Quantity, Historical # of Transactions, Historical Usage
Amount, Lead Time (Days), etc. The Utilization Type Calculation process assigns each item to
the utilization type that it meets.

ABC Analysis in BI

TBD

Reference

[1] How to carry out an ABC analysis of inventory