ABC Analysis of Inventories
ABC analysis is an inventory
categorization method which consists in dividing items into three
categories, A, B and C: A being the most valuable items, C being the least
valuable ones. This method aims to draw managers’ attention on the critical
few (A-items) and not on the trivial many (C-items).
It may also be clear with the help of
the following examples:
“A”
Category – 5% to 10% of the items represent 70% to 75% of the money value.
“B”
Category – 15% to 20% of the items represent 15% to 20% of the money.
“C”
Category – The remaining number of the items represent 5% to 10% of the money
value.
The annual consumption value is calculated with the formula:
= (Annual demand) x
(item cost per unit)
The following steps will explain to
you the classification of items into A, B and C categories:
1. Find out the unit cost and the usage of each
material over a given period.
2. Multiply the unit cost by the estimated annual
usage to obtain the net value.
3. List out all the items and arrange them in the
descending value. (Annual Value)
4. Accumulate value and add up number of items and
calculate percentage on total inventory in value and in number.
5. Draw a curve of percentage items and percentage
value.
6. Mark off
from the curve the rational limits of A, B and C categories.
Advantages
of ABC Analysis:
·
Classification of items.
·
Variation of prices can be done and
identified easily.
·
Emergency needs can be fulfilled.
·
Visualization of stock levels can be
done.
·
Record maintaining is easy.
·
Inventory analysis can be done easily.
Dis- advantages of ABC Analysis:
·
It has to be done in standard way.
·
Lowest cost items get no importance.
·
Coding of item should be done properly
otherwise ABC analysis fail.
·
Cost factors in analysis may not match
with the market dynamics.
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