ABC ANALYSIS management

1. ABC ANALYSIS
SUDESHNA BANERJEE
M.SC (N) 2ND YEAR

2. INVENTORY
INVENTORY is defined as “the systematic control and
regulation of purchase, storage and usage of materials in
such a way so as to maintain an even flow of production
and at the same time avoiding excessive investment in
inventories”

3. ABC analysis
ABC = Always Better Control
A technique which would enable a busy executive to
chase those activities ardently which would quicken the
wheels of administrative machinery
First introduced by an AMERICAN FIRM- GENERIC
ELECTRIC COMPANY
Based on Pareto’s principle of “Vital few & trivial many”
based on the capital investment of the item

4. “A” ITEMS
Small in number, but consume large amount of
resources (10% items consume about 70% of budget)
Must have:
Tight control
Strict & close watch
Low safety stocks
Management by top level managers

5. “B ITEMS”
Intermediate (20% consume 20% of financial
resources)
Must have:
Moderate control
Purchase based on rigid requirements
Reasonably strict watch & control
Safety stocks moderate
Managed by middle level management

6. “C ITEMS”
Larger in number, but consume lesser amount of
resources (70% items account for just 10% of budget )
Must have:
Ordinary control measures
Purchase based on usage estimates
High safety stocks
ABC analysis does not stress on items those are less
costly but may be vital

7. PRINCIPLES OF ABC ANALYSIS
The analysis depends on its annual consumption
values
The limits for ABC categorization are not uniform
but depends on the size of organization

8. Cont…
The analysis does’nt depend on the importance of
items rather based on material price, & available status
of material, material physical characteristic(durability)
& frequency of material usage
It also depends on degree & characteristics of controls to
be exercised by the management

9. 6-STEPS USED TO PERFORM AN
ABC ANALYSIS
Identify the objective and the analysis criterion
Collect data about the analyzed population
Sort out the list by decreasing impact

10. Cont…
Calculate the accumulated impact and the
percentage
Identify the classes
‡
Analyze the classes and take appropriate
decisions

11. ADVANTAGES OF ABC ANALYSIS
CONTROL: helps to maintain the stock, right
inventory allows a company to control over supply
& under supply
COST: Once a company has determined which
items fall into ABC category it can establish cost
reduction initiatives
IMPROVED SERVICE

12. DISADVANTAGES; ABC ANALYSIS
Considers only the money value not the
importance of items for functioning
Proper standardization & codification of inventory
items is required
It gets harder to do correctly the longer you do
them

13. SUMMARY
 Inventory
ABC analysis
ABC categorization
Principles of ABC analysis
6-steps to perform an ABC analysis
Advantages
Disadvantages