How to carry out an ABC inventory analysis

One of the key techniques used in supply chain and inventory control is the method of ABC analysis. It’s often seen as the starting point in inventory control and is often used as a key lever on which to base various other inventory tasks such as stock counting, strategic purchasing decisions, storage locations etc.

ABC analysis is an important tool as not all inventory or parts require the same management attention. For example does a $500,000 Engine require the same controls as a bolt which costs $1? By conducting the analysis you can determine which parts require most management attention.

ABC analysis is a categorization system and is often seen as a relation to the Pareto tool in that it is utilizes similar principles to categorize. ABC analysis will typically use three categories, with each category utilizing different management controls for the inventory or part numbers within it. A part’s category is usually determined through calculating the annual consumption value which can be achieved through multiplying the amount of product consumed in a given period (often a year) by it’s price. Once each part has a value they are then grouped.

While you may find different industries utilizing varying “rule sets” for grouping parts – typically the bands will follow close to a 70%, 90%, 100% groups.

70% of the value is represented by the A class items

Between 70% and 90% relates to B class items

C class make up the remaining.

Once you’ve carried out your ABC analysis you’ll generally find that the high cost materials will be categorized as A class items, and the lower value (and higher volume and fast moving parts) will be determined as C class.
As stated once your ABC analysis is complete you’ll want to set your procedures and policies up accordingly. For example

A class parts typically require close monitoring and tight control – they tend to be complex expensive parts and while they will amount to a large costs may probably represent a small percentage of your overall inventory volume (which is where the similarities with Pareto occur).

B class whilst lower grade than A class parts still require more control than consumables and will require some management effort.

C class require the least controls, and will typically make up the largest volume of your stock
ABC analysis is a basic stock management principle that when applied can have direct impact on the policies and procedures that govern your inventory. Take a look at your ERP system – ERP’s will typically contain functionality to both carry out an ABC analysis but also store it as a control mechanism within the system itself.

Bear in mind also that ABC analysis is not a one off exercise and should be considered a periodic process in order to ensure that the controls and efficiencies created are maximized.

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