ABC Technique

ABC Technique

The ABC analysis is a business term used to define an inventory categorization technique often used in material management. It is also known as "Selective Inventory Control. " Policies based on ABC analysis:

• A ITEMS: very tight control and accurate records
• B ITEMS: less tightly controlled and good records
• C ITEMS: 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 while also providing a mechanism for identifying different categories of stock that will require different management and controls.

The ABC analysis suggests that an organization's inventories are not of equal value. Thus, the inventory is grouped into three categories (A, B, and C) according to 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 less important than A items and more important than C items. B items are intergroup items.
• C items are marginally important.

The following is an example of the application of weighted operation based on the ABC class in an electronics manufacturing company with 4,051 active parts.

ABC analysis Actual distribution of ABC class in the electronics manufacturing company with 4051 active parts.

• Uniform Purchase: When you apply an equal purchasing policy to all 4,000 components, for example, weekly delivery and re-order point (safety stock) of two-week supply, assuming that there are no lot size constraints, the factory will have 16,000 deliveries in four weeks, and the average inventory will be 2.5 weeks supply.
• Weighed Purchase: In comparison, when weighed purchasing policy applied based on ABC class, for example, C class monthly (every four weeks) delivery with the re-order point of three-week supply, B class Bi-weekly delivery with the re-order point of two-week supply, A class weekly delivery with re-order point of one-week supply, total number of delivery in four weeks will be (A 200x4=800)+(B 400 x2=800) + (C 3400x1=3400)=5000 and average inventory will be (A 75%x1.5weeks)+(B 15%x3weeks)+ (C 10%x3.5weeks)= 1.925 week supply.

By applying weighed control based on ABC classification, required man hours and inventory level are drastically reduced.

Key Points

• A items: very tight control and accurate records; B items: less tightly controlled and good records; C items: 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, 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.

Term