ABC analysis is that technique of material control in which we divide our material into three categories and investment is done according to the value and nature of that category’s materials. After this, we control of material according to their level of investment. We need not to control all the categories but we have to control those materials which are in a category.
ABC analyses have the potential to provide rich qualitative data for identifying antecedents and consequences associated with challenging behavior, as well as some quantitative information.
This analysis recommends that the management should focus on key issues of decision making to simplify the decision making process. It will help the management to put their energy and efforts towards the majority areas requiring utmost attention. As per this analysis, the total inventory list will be divided into three classes A, B and C:
A category materials and its control
In these category materials, we include 10% of total material, but its cost will be high, so its investment requirement will also be very high and it may be 70% of total investment in inventory. Store keeper should make safe these materials from any wastage, because its price or demand is very high. Store keeper also keeps its economic order quantity and tries to decrease misuse of money in this category.
A category which will also require special attention due to the “large amount of money” they represent. A small “mistake” in managing the few A Category materials may cost a lot to your company.
B category materials and its control
In this category, there are many normal materials can be included which are needed for production. Store keeper can classify 20% of material and we need 20% of total investment in this type of inventory for buying. But its control is also necessary, because without this, production may be delay. So, store keeper should not ignore its control and for continuing supply, storekeeper should maintain its minimum, maximum and re-order level.
C category materials and its control
There is no need to control this type of material but normal care is needed for keeping this material in right position before using it for production. Its quantity is of 70% of total quantity but cost is 10% of total investment in inventory. So, overstocking can increase store cost and interest on capital. So, purchase should be in hand.
The ABC approach states that, when reviewing inventory, a company should rate items from A to C, basing its ratings on the following rules:
A-items are goods which annual consumption value is the highest. The top 70-80% of the annual consumption value of the company typically accounts for only 10-20% of total inventory items.
C-items are, on the contrary, items with the lowest consumption value. The lower 5% of the annual consumption value typically accounts for 50% of total inventory items.
B-items are the interclass items, with a medium consumption value. Those 15-25% of annual consumption value typically accounts for 30% of total inventory items.
The control of inventory is exercised as follows: