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ABC analysis
is a basic supply chain technique, often carried out by
inventory controllers/materials managers, and is the
starting point in inventory control.
A system of categorization, with similarities to Pareto
analysis, the method usually categorizes inventory into
three bands with each band having a
different management
control associated. Although different criteria may be
applied to each category the typical method of “scoring” an
inventory item is that of annual consumption value of said
item (qty consumed X cost of item) with the result then
ranked and then scored (A, B or C).
Bandings may be specific to the industry but typically
follow a 70%, 90%, 100% banding in that A class items
represent 70% of the value, B class |
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items fall
between 70% and 90% of the annual value with C class the
remaining. In practical terms the complex high cost
materials typically fall into the A class items, with the
consumable, low cost (and typically fast moving) classed as
C class.
Not all stock is equally valuable and therefore doesn’t
require the same management focus. The results of the ABC
analysis provide information that helps evaluate how each
inventory part should be monitored and controlled. These
controls are typically:
A class items which are critically important and require
close monitoring and tight control – while this may account
for large value these will typically comprise a small
percentage of the overall inventory count. |
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B class are of lower criticality requiring standard controls
and periodic reviews of usage.
C class require the least controls, are sometimes issues as
“free stock” or forward holding.
In summary, ABC Analysis is the basis for material
management processes and helps define how stock is
managed. It can form the basis of various activity
including leading plans on alternative stocking
arrangements (consignment stock), reorder calculations and
can help determine at what intervals inventory checks are
carried out (for example A class items may be required to
be checked more frequently than c class stores. |
