Understanding ABC Analysis for Inventory Management

Oct 1, 2024

ABC Analysis Lecture Notes

Introduction to ABC Analysis

  • As industry size increases, inventory management becomes crucial.
  • Importance of purchasing and controlling inventory in bulk before use.
  • High costs associated with inventory management, making it essential to optimize.

Goals of ABC Analysis

  • Segregates inventories based on value.
  • Helps determine how to control inventory levels efficiently.

Steps Involved in ABC Analysis

  1. Identify all inventories used in the industry.
  2. List items according to their value.
  3. Count the number of high, medium, and low valued inventories.
  4. Calculate percentages of high, medium, and low valued inventories:
    • High valued items: ~70% of total inventory cost
    • Medium valued items: ~20% of total inventory cost
    • Low valued items: ~10% of total inventory cost
  5. Graph plotting:
    • Graph between percentage of inventory and total inventory cost.
    • Shows:
      • 70% cost from 10% of inventory (A items)
      • 20% cost from 20% of inventory (B items)
      • 10% cost from 70% of inventory (C items)

Categories of Inventory

A Items (High Value)

  • Represent 10% of total inventory but account for 70-80% of total inventory cost.
  • Require close control and careful handling.
  • Need to be purchased in advance in smaller quantities to mitigate risk of non-availability.
  • Maintain detailed records for receipts and issues.

B Items (Medium Value)

  • More significant than C items, moderate control necessary.
  • Purchased based on past requirements; reorder as stock touches reorder point.
  • Can maintain a safety stock of up to 3 months.
  • Require careful handling but not as intensive as A items.
  • Generally account for 15-20% of total items and 20-15% of the total inventory cost.

C Items (Low Value)

  • Constitute about 75% of total inventory but only account for 10-15% of total inventory cost.
  • Do not require stringent control; considered least important.
  • Reordered just before depletion; future needs are not calculated.
  • Simple 2-bin system could be sufficient for procurement.

Conclusion

  • ABC analysis helps in optimizing inventory levels effectively.
  • Important to tailor inventory management strategies based on item classification.

Additional Resources

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