2. ABC Analysis - Preview
Objective - The need to rank inventory items in terms of importance.
Conceptualized by H. Ford Dicky of General Electric (GE) in 1951.
Premise of Concept- This classify items according to relative sales volume , cash
flows , lead time , or stock out costs.
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3. ABC Analysis – Characteristics of A items
Class A Items - the important few
Very few high impact items are included
Require the most managerial attention and review
Expect many exceptions to be made
Only 20 percent of the items in the product line account for 80 percent of total
sales.
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4. ABC Analysis – Characteristics of B items
Class B Items – the middle-share
Many moderate impact items (sometimes most)
Automated control w/ management by exception
Rules can be used for A (but usually too many exceptions)
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5. ABC Analysis – Characteristics of C items
Class C Items - the trivial many
Many if not most of the items that make up minor impact
Control systems should be as simple as possible
Reduce wasted management time and attention
Group into common regions, suppliers, end users
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6. Performing an ABC Classification
ABC classification is relatively simple.
Step 1 – Select some criterion for developing the ranking.
Step 2 – Rank items in descending order of importance according to the
criterion stated & to calculate actual and cumulative total revenue percentages
for each item.
[This calculation will allow the items to be grouped into the ABC categories].
Step 3- The last step is to assign the items into ABC groups/items.
[ The most difficult step is to assign the items into ABC groups. Based upon the
discretion and importance attached to the items (subjective judgement) of the
decision maker supported by the data inputs.]
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11. 11
Illustration of
ABC Analysis Item
Code
Annual
Revenue
(Rs.)
Percentage
of Annual
Revenue
Cumulativ
e Revenue
Percentages
Items
Classification
Category
66 T 6,800 68% 68% 10% A
78 R 1,200 12% 80% 20% A
68 O 500 5% 85% 30% B
89 E 400 4% 89% 40% B
15 U 200 2% 91% 50% B
32 A 200 2% 93% 60% B
31 B 200 2% 95% 70% B
81 Q 200 2% 97% 80% C
98 K 150 1.5% 98.5% 90% C
70 W 150 1.5% 100% 100% C
Rs. 10,000 100%
12. Let’s Summarize
ABC analysis is a useful tool to improve the effectiveness of inventory
management.
‘A’ item costs approximately 60-80% of the total cost of inventory while they are
less in number.
‘B’ items cost 20- 30 % of the total cost of inventory while they are less in
number.
‘C’ class items are greater in number and carry less than 10 percent of the total
inventory.
It is the financial evaluation for ranking and comparison of inventories.
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