ABC Inventory Analysis
ABC analysis provides a mechanism for identifying items that will have a significant impact on overall inventory cost and helps to identify different categories of stock that will require different management and controls (Wikipedia 2011).Related to Pareto analysis (80/20 rule) the A inventory items are the most important or items with the most capital tied up. These items are managed more carefully than the 'less important' or less costly items (B & C).Classification can be based on sales, profit contribution, inventory value, usage rate and item category (Bowersox, 2010).
Inventory management of the category A items should utilize the latest in inventory management techniques and technologies since this represents the most important inventory.
The category B items should also be well managed, but do not require the investment that the A items warrent.
The C category items are slower moving and represent a small investment and can be managed using less onerous methods.
- For each stock keeping unit (SKU) record its annual volume and unit cost
- Calculate the dollar volume for each SKU as volume * unit cost
- Sort the items in descending order of dollar volume
- Add up the total dollar volume for all items
- Calculate the percentage of each SKU toward the total dollar volume as: SKU dollar volume / total dollar volume
- Assign SKUs to the A category until the percentage of the total dollar volume assigned represents 80% of the total (usually 80%).
- Assign the next set of SKUs to the B category until the total dollar volume assigned represents 15% of the total (usually 15%).
- The remaining items represent the lowest 5% of the dollar volume, which are the C category items.
ReferencesBowersox, Closs & Cooper, 2010. Supply Chain Logistics Management, 3rd Edition. McGraw-Hill, New York