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).

Classification Procedure

  1. For each stock keeping unit (SKU) record its annual volume and unit cost
  2. Calculate the dollar volume for each SKU as volume * unit cost
  3. Sort the items in descending order of dollar volume
  4. Add up the total dollar volume for all items
  5. Calculate the percentage of each SKU toward the total dollar volume as: SKU dollar volume / total dollar volume
  6. Assign SKUs to the A category until the percentage of the total dollar volume assigned represents 80% of the total (usually 80%).
  7. Assign the next set of SKUs to the B category until the total dollar volume assigned represents 15% of the total (usually 15%).
  8. The remaining items represent the lowest 5% of the dollar volume, which are the C category items.
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.

References

Bowersox, Closs & Cooper, 2010. Supply Chain Logistics Management, 3rd Edition. McGraw-Hill, New York