ABC ANALYSIS

Presented By: Dhanya .V Roll No: 07

ABC ANALYSIS (ALWAYS BETTER CONTROL)

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. It stands for Always Better 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. ABC analysis is an important tool in hand of purchase manager who has to handle thousands and lakhs of items of any manufacturing units as per scale.

Purchase manager can ask for ABC analysis for items for the unit and can put greater control or do more value analysis for the items which are categorized A , other categories are B and C . It is very difficult to exercise control over all the items. Controlling means transactions related to inventory, degree of control, type of records to be maintained, lot sizes, frequency of review, size of safety stock to be maintained etc. ABC analysis helps to classify the thousands or even millions of individual items into three groups namely items belonging to A group, B group, C group items respectively. ABC analysis is done based on the Paretos principle.

Consumption value is the basis for ABC classification. Consumption value is the product of unit price and consumption.

Mechanism of doing ABC classification: Steps involved: 1. Collect previous year consumption and unit price for each item 2. Multiply the consumption and unit price for each item to get the consumption value 3. Rank the items corresponding to the consumption value 4. Calculate cumulative consumption value against each item 5. Find the percentage of cumulative consumption value. Usually to classify the items into A class there is leverage available. The leverage is 60 to 70 percentage of consumption value. This means you can fix the cut-off value in between 60 to 70 percentage of consumption and the corresponding items which contribute up to the cut-off value are classified as A class items. Similarly to classify the items into B class, there is a leverage of the consumption value to the extent of 10 to 20 percentage of consumption value. To classify the items into C class, there is a leverage of the consumption value to the extent of 10 to 20 percentage of consumption value.

Class of items A B C

Cut-off % of consumption value 60-75 10-20 5-10

Kinds of Control Purpose of classifying the items into ABC is to control over each item. The degree of control required for A class is not same for B and C class items. The following table helps the material manager in the kind of control to be exercised on these items.

Advantages of ABC analysis: 1. Better exercise of control over all materials 2. The capitol invested in inventory can be reduced to minimum levels 3. Warehouse and storage costs can be reduced

Limitations of ABC analysis:

ABC analysis mainly provides a guideline for inventory management. It needs to be supplemented by basic understanding and judgment as there are certain items which may fall into category C or category B due to their low usage value but are otherwise very critical for the production process of the firm. Their inventory levels have to be carefully monitored.

The ABC analysis, to be effective, needs to be constantly undertaken and periodically reviewed by management, as the number of items and value of items keep on undergoing change over time.

The practical problem in the use of ABC analysis is that generally thousands of items fall in category C, as a result a lot of time is spent on managing inventory of items of this category .The time left for controlling the inventory stocks of categories A and is therefore much shorter than that required for their effective management

Conclusion To make the most effective use of ABC classifications, the analysis should be completed at least on an annual basis, and more often as necessary if there are significant changes in the MRO activity level.