ABC analysis

In mat erials management , ABC analysis is an invent ory cat egorisat ion t echnique. ABC
analysis divides an invent ory int o t hree cat egories—"A it ems" wit h very t ight cont rol and
accurat e records, "B it ems" wit h less t ight ly cont rolled and good records, and "C it ems" wit h
t he simplest cont rols possible and minimal records.

The ABC analysis provides a mechanism for ident ifying it ems t hat will have a significant
impact on overall invent ory cost ,[1] while also providing a mechanism for ident ifying different
cat egories of st ock t hat will require different management and cont rols.

The ABC analysis suggest s t hat invent ories of an organizat ion are not of equal value.[2] Thus,
t he invent ory is grouped int o t hree cat egories (A, B, and C ) in order of t heir est imat ed
import ance.

'A' it ems are very import ant for an organizat ion. Because of t he high value of t hese 'A' it ems,
frequent value analysis is required. In addit ion t o t hat , an organizat ion needs t o choose an
appropriat e order pat t ern (e.g. 'just -in-t ime') t o avoid excess capacit y. 'B' it ems are import ant ,
but of course less import ant t han 'A' it ems and more import ant t han 'C' it ems. Therefore, 'B'
it ems are int ergroup it ems. 'C' it ems are marginally import ant .

ABC analysis categories

There are no fixed t hresholds for each class, and different proport ions can be applied based
on object ives and crit eria. ABC Analysis is similar t o t he Paret o principle in t hat t he 'A' it ems
will t ypically account for a large proport ion of t he overall value, but a small percent age of t he
number of it ems.[3]
Examples 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 the items
'C ' items – 50% of the items accounts
for 5% of the annual consumption
value of the items
Anot her 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 of the items

ABC analysis in ERP

packages
Major ERP packages have built -in funct ion of ABC analysis. User can execut e ABC analysis
based on user defined crit eria and syst em apply ABC code t o it ems (part s).

Mathematical calculation of
ABC analysis
Comput ed (calculat ed) ABC analysis delivers a precise mat hemat ical calculat ion of t he limit s
for t he ABC classes.[5] It uses an opt imizat ion of cost (i.e. number of it ems) versus yield (i.e.
sum of t heir est imat ed import ance). Comput ed ABC was, for example, applied t o feat ure
select ion for biomedical dat a,[6] business process management [7] and bankrupt cy predict ion.[8]
Example of the application
of weighed operation based
on ABC class
Act ual dist ribut ion of ABC class in t he elect ronics manufact uring company wit h 4,051 act ive
part s.

Distribution of ABC class

ABC class Number of items Total amount required

A 20 ％ 60％
B 20％ 20％

C 60％ 20％

Tot al 100％ 100％

Using t his dist ribut ion of ABC class and change t ot al number of t he part s t o 14,213.

Uniform purchase
When equal purchasing policy is applied t o all 14,213 component s, for example weekly
delivery and re-order point (safet y st ock) of t wo weeks' supply, t he fact ory will have 16,000
deliveries in four weeks and average invent ory will be 2½ weeks' supply.
Application of weighed purchasing condition

Uniform condition Weighed condition

Items Conditions Items Conditions

Re-order point =1 week's

A-class it ems
supply
200
Delivery frequency=weekly

Re-order point =2 weeks'

Re-order point =2 weeks' B-class it ems supply
All it ems
supply 400 Delivery frequency=bi-
14,213
Delivery frequency=weekly weekly

Re-order point =3 weeks'

C-class it ems supply
3,400 Delivery frequency=every 4
weeks

Weighed purchase
In comparison, when weighed purchasing policy is applied based on ABC class, for example C
class mont hly (every four weeks) delivery wit h re-order point of t hree weeks' supply, B class
bi-weekly delivery wit h re-order point of 2 weeks' supply, A class weekly delivery wit h re-
order point of 1 week's supply, t ot al number of delivery in 4 weeks will be (A 200×4=800)+(B
400×2=800)+(C 3,400×1=3,400)=5,000 and average invent ory will be (A 75%×1.5weeks)+(B
15%x3 weeks)+(C 10%×3.5 weeks)=1.925 weeks' supply.
Comparison of "equal" and "weighed" purchase (4 weeks span)

Equal purchase Weighed purchase

% of No of No of
ABC No of average average
total delivery delivery note
class items supply supply
value in 4 in 4
level level
weeks weeks

same delivery
frequency, safet y
1.5 st ock reduced from 2.5
A 200 75% 800 2.5 weeks 800
weeksa t o 1.5 weeksa, require
t ight er cont rol wit h
more man-hours.

increased safet y st ock

level by 20%, delivery
B 400 15% 1600 2.5 weeks 800 3 weeks frequency reduced t o
half. Fewer man-hours
required.

increased safet y st ock

from 2.5 t o 3.5 weeks'
supply, delivery
C 3400 10% 13,600 2.5 weeks 3,400 3.5 weeks frequency is one
quart er. Drast ically
reduced man-hour
requirement .

average invent ory value

reduced by 23%,
1.925 delivery frequency
Tot al 4,000 100% 16,000 2.5 weeks 5,000
weeks reduced by 69%. Overall
reduct ion of man-hour
requirement .

a)
A class it em can be applied much t ight er cont rol like JIT daily delivery. If daily delivery wit h
one day st ock is applied, delivery frequency will be 4,000 and average invent ory level of A
class it em will be 1.5 days' supply and t ot al invent ory level will be 1.025 weeks' supply, a
reduct ion of invent ory by 59%. Tot al delivery frequency is also reduced t o half from 16,000 t o
8,200.
 Result
By applying weighed cont rol based on ABC classificat ion, required man-hours and invent ory
level are drast ically reduced.

Alternate way of finding ABC analysis:-

The ABC concept is based on Paret o's law.[9] If t oo much invent ory is kept , t he ABC analysis
can be performed on a sample. Aft er obt aining t he random sample, t he following st eps are
carried out for t he ABC analysis.

Step 1: Compute the annual usage

value for every item in the sample by
multiplying the annual requirements by
the cost per unit.
Step 2: Arrange the items in
descending order of the usage value
calculated above.
Step 3: Make a cumulative total of the
number of items and the usage value.
Step 4: Convert the cumulative total of
the number of items and usage values
 into a percentage of their grand totals.
Step 5: Draw a graph connecting
cumulative % items and cumulative %
usage value. The graph is divided
approximately into three segments,
where the curve sharply changes its
shape. This indicates the three
segments A, B and C.

Benefits of ABC Analysis

Select ive Invent ory Cont rol bet t er known as ABC analysis has great advant ages t o
businesses and among t he benefit s of t his invent ory management t ool includes:

Improved inventory control– By

categorizing items based on their value
and importance, the management can
focus their resources on the most
important items and ensure that they
are appropriately managed.[10]
Correct sales forecasting– By
analyzing sales data and inventory
levels, the management improves
sales forecasting.
Cost reduction– ABC analysis allows
the management to focus on products
A which are more important. By doing
so, the cost which could be spent on
managing other items i.e B and C are
saved.[11]
Increased cash flow– ABC gets rid of
excess unnecessary inventory and
reduces the chances of stockout.
Holding cost and stockout are the
 main dictators of cash flow and
avoiding them improves cash flow.

See also

Stock management

References

1. Manufacturing planning and control

systems for supply chain management By
Thomas E. Vollmann

2. Lun, Lai, Cheng (2010) Shipping and

Logistics Management, p. 158

3. Purchasing and Supply Chain

Management By Kenneth Lysons, Brian
Farrington

4. Best Practice in Inventory Management,

by Tony Wild (2nd Ed., p. 40)
5. Ultsch, Alfred, Jörn Lötsch. "Computed
ABC analysis for rational selection of
most informative variables in multivariate
data." PLOS One 10.6 (2015): e0129767.

6. Kringel, D., Ultsch, A., Zimmermann, M.,

Jansen, J. P., Ilias, W., Freynhagen, R., ... &
Resch, E. (2016). Emergent biomarker
derived from next-generation sequencing
to identify pain patients requiring
uncommonly high opioid doses. The
pharmacogenomics journal.

7. Iovanella, A.: Vital few e trivial many, Il

Punto, pp 10-13, July, 2017.

8. Barbara Pawelek, Jozef Pociecha,

Mateusz Baryla, ABC Anal-ysis in
Corporate Bankruptcy Prediction,
Abstracts of the IFCS Conference, p 17,
Tokyo, Japan,2017
 9. Pareto's law in this example is that a few
high usage value items constitute a major
part of the capital invested in inventories
whereas a large number of items having
low usage value constitute an insignificant
part of the capital.

10. Production Management: Latest Edition (h

ttps://books.google.com/books?id=sRO2
DQAAQBAJ&dq=benefits+of+ABC+analys
is&pg=PA196) . SBPD Publications. 2016-
12-14. ISBN 978-93-83697-83-0.

11. "Effective Techniques for Inventory Stock

Control - SIPMM Publications" (https://pu
blication.sipmm.edu.sg/effective-techniqu
es-inventory-stock-control/#ABC_Inventor
y_Analysis) . publication.sipmm.edu.sg.
2018-10-14. Retrieved 2023-03-24.
External links

SAP library ABC Analysis (http://help.s

ap.com/saphelp_46c/helpdata/en/c1/
375b7e449a11d188fe0000e8322f96/c
ontent.htm)
Oracle Overview of ABC Analysis (htt
p://download.oracle.com/docs/cd/A6
0725_05/html/comnls/us/inv/abcov.ht
m)
ABC Analysis in MS Excel (https://web.
archive.org/web/20200622144037/htt
ps://www.alittleprogresss.com/abc-an
alysis-in-excel-fastest-way-to-apply-ab
c-analysis.html)
 ABC Analysis in R (https://cran.r-projec
t.org/web/packages/matman/)

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