ABC Analysis

In materials management, the ABC analysis (or Selective Inventory Control) is an inventory categorization
technique. ABC analysis divides an inventory into three categories—"A items" with very tight control and
accurate records, "B items" with less tightly controlled and good records, and "C items" with the simplest
controls possible and minimal records.

The ABC analysis provides a mechanism for identifying items that will have a significant impact on overall
inventory cost,[1] while also providing a mechanism for identifying different categories of stock that will
require different management and controls.

The ABC analysis suggests that inventories of an organization are not of equal value.[2] Thus, the
inventory is grouped into three categories (A, B, and C) in order of their estimated importance.

'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.
 ABC Analysis Categories

There are no fixed threshold for each class, different proportion can be applied based on
objective and criteria. ABC Analysis is similar to the Pareto principle in that the 'A' items will
typically account for a large proportion of the overall value but a small percentage of the
number of items.[3]
Examples of ABC class are

'A' items – 20% of the items accounts for 70% of the annual consumption value of the items
'B' items – 30% of the items accounts for 25% of the annual consumption value of the items
'C' items – 50% of the items accounts for 5% of the annual consumption value of the items
Another recommended breakdown of ABC classes:[4]

"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
Example of the application of weighed operation based on
ABC class
  Actual distribution of ABC class in the electronics manufacturing company
with 4051 active parts.
Distribution of ABC class
ABC class
A 20% 60%
B 20% 20%
C 60% 20%
Total 100% 100%
Uniform purchase
When one applies equal purchasing policy to all 14213 components, example weekly delivery and re-
order point (safety stock) of two weeks' supply assuming that there are no lot size constraints, the
factory will have 16000 delivery in four weeks and average inventory will be 2½ weeks' supply.
Weighed condition
Uniform condition
Items Conditions
Items Conditions
A-class items 200 Re-order point=1 week's supply
All Re-order point=2 weeks' supply Delivery frequency=weekly
items Delivery frequency=weekly
B-class items 400 Re-order point=2 weeks' supply
14213
Delivery frequency=bi-weekly
C-class items Re-order point=3 weeks' supply
3400 Delivery frequency=every 4 weeks
Result
By applying weighed control based on ABC classification, required man-hours and inventory level are
drastically reduced.

Alternate way of finding ABC analysis:-

The ABC concept is based on Pareto's law.[9] If too much inventory is kept, the ABC analysis can be
performed on a sample. After obtaining the random sample the following steps are carried out for
the ABC analysis.

Step 1: Compute the annual usage value for every item in the sample by multiplying the annual
requirements by the cost per unit.

Step 2: Arrange the items in descending order of the usage value calculated above.

Step 3: Make a cumulative total of the number of items and the usage value.

Step 4: Convert the cumulative total of the number of items and usage values into a percentage of
their grand totals.

Step 5: Draw a graph connecting cumulative % items and cumulative % usage value. The graph is
divided approximately into three segments, where the curve sharply changes its shape. This indicates
the three segments A, B and C.
 Reorder Procedure

In reorder procedure, the PPC department decides when to order and

how much to order.
The time of order can either be according to stock level or prefixed time
scale.
The type of reordering processes are of two types
1)Fixed order quantity system or minimum maximum order system or
reorder point system.
2)Fixed order interval system or periodic ordering system or periodic
review or ordering cycle.
 Reorder Point System
The reorder point (ROP) is the level of inventory which triggers an action
to replenish that particular inventory stock. It is a minimum amount of
an item which a firm holds in stock, such that, when stock falls to this
amount, the item must be reordered. It is normally calculated as the
forecast usage during the replenishment lead time plus safety stock. In
the EOQ (Economic Order Quantity) model, it was assumed that there is
no time lag between ordering and procuring of materials. Therefore the
reorder point for replenishing the stocks occurs at that level when the
inventory level drops to zero and because instant delivery by suppliers ,
the stock level bounce back.