Abc inventory classification
| Abc inventory classification |
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ABC inventory classification (ABC method, ABC analisys) - The method of ABC classification analysis is one of the most adopted techniques in the industrial units. Company inventories are classified into different categories based on the value and frequency of replenishment in the given period.
The most important element in this classification is a chosen criterion (you can focus just on one criteria) e.g. volume of material release, the value of sold products. „The first step in the ABC analysis is to create a ranked list of items by cost of goods sold. The top 20% of the items are labeled A-items. The next 30% of the items in the list are labeled B-items and the remaining % are labeled C-items. Of course, these percentages can vary depending upon the needs of the firm”(Chad W. Autry and others, 2013, s.103).
The ABC analysis is based on the principle of determining the Lorenz curve, „where the x-axis is the percentage of items ant the y-axis is the percentage of total annual usage” (Chad W. Autry and others, 2013, s.103). During creating ABC analysis it is necessary to order inventory positions from the biggest to the lowest values according to the adopted criterion.
Inventory groups in the ABC classification
ABC Inventory Classification divides inventories for three groups:
- Group A
„Group ‘A ‘ items, consist of only a small percentage of the Total items handled but Has a combined value that constitutes a major large portion of a Total Stock holding of the concern” (D. Chandra Bose 2006, s.33). They „require tight control and the most accurate record-keeping. These are typically to high-value items, and though few in number, they can make up 70 to 80 % of the total inventory value” (Lea R. Dopson, David K. Hayes, 2010, s.192).
- Group B
As D. Chadra Bose says, items from group B are less important compared to items from group A (D. Chandra Bose2006, s.33), which „are those that make up 10 to 15 % of the inventory value and require only routine control and record-keeping” (Lea R. Dopson, David K. Hayes, 2011, s.192).
- Group C
„In contrast, C items are not as important from an investments point of view and therefore should be ordered and counted less frequently” (Chad W. Autry and others, 2013, s.103). These „items make up only 5 to 10% of the inventory value. These items require the simplest of inventory control systems. (Lea R. Dopson, David K. Hayes, 2010, s.192).
Phase the ABC inventory classification
The five steps in ABC are (Jae K. Shim, Joel G. Siegel, Allison I. Shim, 2012, s.409):
- Segregate inventory into components.
- Compute annual dolar usage by inventory type.
- Rank inventory according to dolar usage ranging from high to low (e.g., As in top 30 percent. Bs in next 50 percent, and Cs in last 20 percent).
- Tag inventory with the appropriate classification so proper attention can be given to it.
- Record classifications in the inventory records.”
References
- Autry Ch. W., Bell J. E., Goldsby T. J., Hill A. V. (2013), Managing the Global Supply Chain (Collection), Pearson Education, Inc., Publishing as FTPress Delivers, Upper Sadle River, New Jersey.
- Bose D. Ch. (2006), Inventory management,Prentice-Hall of India Private Limited, New Delhi.
- Dopson L. R., Hayes D. K. (2011), Food and Beverage cost control, John Wiley & Sons, Inc., New Jersey.
- Siegel J. G., Shim A. I., Shim J. K. (2012),CFO Fundamentals: Your Quick Guide to Internal Controls, John Wiley & Sons, Inc., New Jersey.
Author: Weronika Chudzik
