ABC analysis

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ABC analysis is a business term used to define an inventory categorization technique often used in materials management. It is also known as Selective Inventory Control.

ABC analysis provides a mechanism for identifying items which will have a significant impact on overall inventory cost ^[1] whilst also providing a mechanism for identifying different categories of stock that will require different management and controls^[2]

When carrying out an ABC analysis, inventory items are valued (item cost multiplied by quantity issued/consumed in period) with the results then ranked. The results are then grouped typically into three bands^[3]. These bands are called ABC codes.

ABC codes

1. "A class" inventory will typically contain items that account for 80% of total value, or 20% of total items.
2. "B class" inventory will have around 15% of total value, or 30% of total items.
3. "C class" inventory will account for the remaining 5%, or 50% of total items.

ABC Analysis is similar to the Pareto principle in that the "A class" group will typically account for a large proportion of the overall value but a small percentage of the overall volume of inventory.^[4]

References

1. ↑ Manufacturing planning and control systems for supply chain management By Thomas E. Vollmann
2. ↑ http://www.supplychainmechanic.com/?p=46 How to carry out an ABC analysis of inventory
3. ↑ Oracle E-Business Suite Manufacturing & Supply Chain Management By Bastin Gerald, Nigel King, Dan Natchek
4. ↑ Purchasing and Supply Chain Management By Kenneth Lysons, Brian Farrington

See also

Inventory
Stock_management