ABC Analysis

ABC analysis
The 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. 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 analysisprovides a mechanism for identifying items that will have a significant impact on overall inventory cost,[1] 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. [2] Thus, the inventory is grouped into three categories (A, B, and C) inorder of 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 of course less important, than ‘A’ items and more important than ‘C’items. Therefore ‘B’ items are intergroup items.
'C' items are marginally important.
Contents
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1 ABC analysis categories
2 ABC Analysis in ERP package
3 Example of the Application of Weighed Operation based on ABC class
4 See also
5 References
6 External links
ABC analysis categories[edit]
There are no fixed threshold for each class, different proportion can be applied based on objective andcriteria. ABC Analysis is similar to the Pareto principle in that the 'A' items will typically account for a large proportion of the overall value but a small percentage of number of items.[3]
Example of ABC class are
‘A’ items – 20% of the items accounts for 70% of the annual consumption value of the items.
‘B’ items - 30% of the items accounts for 25% of the annual consumption value of theitems.
‘C’ items - 50% of the items accounts for 5% of the annual consumption value of the items.
Another recommended breakdown of ABC classes:[4]
1. "A" approximately 10% of items or 66.6% of value
2. "B" approximately 20% of items or 23.3% of value
3. "C" approximately 70% of items or 10.1% of value
ABC Analysis in ERP package
Major ERP packages (SAP, Oracle, Microsoft, etc.) have built in functionof ABC analysis. User can execute ABC analysis based on user defined criteria and system apply ABC code to items (parts). See detail at external link.
Example of the Application of Weighed Operation based on ABC class


Actual distribution of ABC class in the electronics manufacturing company with 4051 active parts.
Distribution of ABC class
ABC class
Number of items
Total amount required
A
5％70％
B
10％
15％
C
85％
15％
Total
100％
100％
Using this distribution of ABC class and change total number of the parts to 4000.
Uniform Purchase
When you apply equal purchasing policy to all 4000 components, example weekly delivery and re-order point (safety stock) of 2 week supply assuming that there are no lot size constraints, the factory will have 16000 delivery in 4 weeks and average inventorywill be 2.5 week supply.
Application of Weighed Purchasing condition
Uniform condition
Weighed condition
Items
Conditions
Items
Conditions
　All items 4000
　Re-order point=2 week supply
Delivery frequency=weekly
A-class items　200
Re-order point=1 week supply
Delivery frequency=weekly


B-class items 400
Re-order point=2 week supply
Delivery frequency=bi-weekly


C-class items 3400
Re-order point=3week supply
Delivery frequency=every 4 weeks
Weighed Purchase
In comparison, when weighed purchasing policy applied based on ABC class, example C class monthly (every 4 week) delivery with re-order point of 3 week supply, B class Bi-weekly delivery with re-order point of 2 weeks supply, A class weekly delivery with re-order point of 1 week supply, total number of delivery in 4 weeks will be (A...