ABC Analysis for Inventory Control

By: Amit Gandhi(191068) Anirban Samaddar(191070) Hardeep Singh(191086)

What is it?
It is a business tool used for segmenting inventory. Not all parts are created equal and not all parts require the same management attention. ABC analysis helps to identify those parts that need the most attention. Similar to Pareto s law.

The ABC Classification Process

First, establish the item characteristics that influence the results of inventory management. Such characteristics include: 1.Annual money usage 2.Scarcity of material 3.Quality problems Second, classify items into groups based on the criteria established. Third, apply a degree of control in proportion to the importance of the group.

ABC Classification
Under the ABC inventory control policy, inventory items are classified into 3 groups or items: A items: these are the 20% of the items that tie up 80% of the total inventory money. B items: these are the 30% of the items that tie up 15% of the total inventory money. C items: these are the 50% of the items that tie up 5% of the total inventory money.

Example
Part number 1 2 3 4 5 6 7 8 9 10 Annual unit usage 1,100 600 100 1,300 100 10 100 1,500 200 500 Unit cost 2 40 4 1 60 25 2 2 2 1 Annual money usage 2,200 24,000 400 1,300 6,000 250 200 3,000 400 500

The total annual money usage is 38,250

Example
We sort the items based on their annual money usage, from the highest to the lowest Part number 2 5 8 1 4 10 3 9 6 Annual unit usage 600 100 1,500 1,100 1,300 500 100 200 10 Unit cost 40 60 2 2 1 1 4 2 25 Annual money usage 24,000 6,000 3,000 2,200 1,300 500 400 400 250 Cumulative usage 24,000 30,000 33,000 35,200 36,500 37,000 37,400 37,800 38,050 Cumulative percent usage 63 78 86 92 95 97 98 99 99 Cumulative percent of items 10 20 30 40 50 60 70 80 90

7 100 2 200 38,250 100 100 Group A should include items 2 and 5, which represent 20% of the total inventory.

Example
Group B includes items that hold up about 15% of the total inventory money. We can remove the items in group A from the table. The cumulative percent usages are adjusted by subtracting from them the cumulative percentage usage of the last item in group A. Part number 8 1 4 10 3 9 6 7 Annual unit usage 1,500 1,100 1,300 500 100 200 10 100 Unit cost 2 2 1 1 4 2 25 2 Annual money usage 3,000 2,200 1,300 500 400 400 250 200 Cumulative usage 3,000 5,200 6,500 7,000 7,400 7,800 8,050 8,250 Cumulative Cumulative percent percent of usage items 8 14 17 19 20 21 21 22 10 20 30 40 50 60 70 80

Example
For the inventory table group B includes items 8, 1, and 4. The items that have not been included in group A nor B are grouped under group C. It is clear from the graph that the majority of the money tied up is under group A.

Control Based on the ABC Classification

Group A items should be observed closely and tight control on them should be applied. Group B items are less critical, therefore, they require control that is less than items A. It is sufficient to lightly monitor items in group C.

Advantages of ABC analysis

Control Utilizing the ABC inventory method gives a company more control over the inventory it stores. Costs Because the ABC inventory method makes use of Pareto's law (the basic 80/20 rule), companies can focus on containing the cost of the 20% of items that make up 80% of a companies annual spend. Improved service One of the greatest benefits comes from the improvement in customer service levels and order fulfillment. Warehouse ABC inventory extends to warehouse management as well. Companies utilizing ABC analysis in the warehouse give priority space to faster moving SKUs.

Drawbacks of ABC Analysis

Less control over B and C, etc. items Not an all-purpose inventory control method Profit not necessarily maximized