ABC Analysis

Presented to Mr. Muhammad Rizwan

(Operation Manager)

ABC Analysis
Cost based analysis
One of the most important considerations of control is
the value of annual consumption of inventory items in a
year.
Helps to maintain a reasonable inventory level to
maximize profits by investing minimum in inventory.

Concept of ABC Analysis

About 10 % of materials consume 70 % of
resources, classified as A Items
About 20 % of materials consume 20 % of
resources, classified as B Items
About 70 % of materials consume 10 % of
resources, classified as C Items

Class A Items
Small innumber, but consumelarge amount ofresources
Must have:
Tight control
Rigid estimate ofrequirements
Strict & closer watch
Low safety stocks
Managed by top management

Class B Items
Intermediate
Must have:
Moderate control
Purchase based on rigid requirements
Reasonably strict watch & control
Moderate safety stocks
Managed by middle level management

Class C Items
Larger in number, but consume lesser amount of resources
Must have:
Ordinary control measures
Purchase based on usageestimates
High safety stocks
ABC analysis does not stress on items those are less costly but may be vital

STEPS IN ABC ANALYSIS

The steps in computing ABC analysis are:
a Annual Item/components quantity (consumption).
b. Multiply the annual Items/components quantity
with the average unit price of each item to
calculate the annual cost.
c. Item with highest annual cost is ranked first. Then
the next lower annual cost item is listed till the
lowest item is listed in the last.
d. Arrange the items in the inventory by cumulative
annual cost and by cumulative percentage.
Categorize the items in A, B , and C categories.