ABC analysis is a technique used to categorize inventory items into three categories - A, B and C - based on their annual usage value. Category A items have the highest value and make up around 10-20% of total items but account for around 70-80% of total usage value. Category C items are the opposite, making up 70-80% of total items but only around 10-20% of total usage value. Category B items fall in between. ABC analysis is used to prioritize inventory management efforts - strict controls are applied to A items while low controls can be used for C items. The analysis helps optimize resources by focusing on the most important items.

2. Introduction
 Inventory is defined as a usable resource which is
physical and tangible.

3. What functions does inventory
perform
Regularizing demand and supply
Economising purchases
Allowing organisations to cope with perishable goods
Inventory can store labor

4. Classification of inventory system
Lot size re order point
Fixed order internal scheduling policy
Optional replenishment policy
others

5. ABC analysis
 ABC analysis is basic analytical management tool
which enables top management to place the efforts
where the result will be greatest. This technique is
popularly known as always better control. The
technique tries to analyze the distribution of any
characteristic by money value of importance in order
to determine priority.

6. Quite a large no. of
management • 20% of the machines are responsible for 80% of
problems can be downtime.
successfully solved • 20% of end products generally account for 80%
of total revenue.
by remembering
• 20% of clerks make 80% of the clerical errors.
this simple 20/80 • 20% of employees create 80% of problems.
law, popularly • 20% of the customers are responsible for 80% of
known as preto’s bad debts.
law of “ cause and • 20% of the total items in the stock account for
effect”. The 80% of the total expenditure on the materials.
following are few
illustrations.

7. ABC analysis for selective control
 ABC analysis underlines a very important principle
“vital few-trivial many”. Statistics reveals that just a
handful of items account for bulk of the annual
expenditure on materials. These few items are called
“A” items, therefore hold the key to the business. The
other items, known as B and C items, are numerous in
number, but their contribution is less significant. ABC
analysis thus tends to segregate all items into 3
categories: A, B, C on the basis of their annual usage.

8.  The annual consumption analysis of any organization
would indicate that a handful of top high value items-
less than 10% of total no- will account for substantial
portion of about 75% of the total consumption value
and such vital few items are called ‘A’ items which
need careful attention of the material managers.
Similarly a large no. of “bottom” items- over 70% of
total consumption of units are called trival many-
account only for about 10% of the consumption value
are known as ‘C’ class. The items which lie between the
top and bottom are called ‘B’ category items.

9. Application of ABC analysis
 This application helps the materials manager to
exercise selective control and focus his attention only
on few items when he is confronted with lakhs of store
items. Any sound stock control system should ensure
that every item gets right amount of attention at the
right time. ABC analysis makes it possible with
considerably less efforts by its selective approach. The
following are the applications of ABC analysis:

10. 1.Degree of control:
 A class items form a substantial part of total consumption
in rupees and so it must draw our attention. Up-to-date
and accurate records should be maintained for these items.
The inventory should be kept at minimum by putting
blanket orders covering annual requirements and then
arranging frequent deliveries from vendors.
 B class items should have normal or moderate control
made possible by good records and regular attention.
 A little or no control is required for C class items. Large
inventories should be maintained to avoid stock outs.m

11. 2.Ordering procedure
A class items require careful and accurate determination of order
quantities and order points based on exact requirements. They should be
subjected to frequent reviews to reduce possibility of overstocking.
A reasonably good analysis for order quantities and order point is
required for B items but the stock may be reviewed less frequently.
No such computations are required for C items. These items should be
bought in bulk may be for full year.

12. 3.Stock records
Detailed records of goods reserved, received, ordered, issued
on hand need to be maintained for A category items. Tight
and accurate controls are required for such items.
No such detailed records are necessary for C class items.
Any routine method that ensures good and accurate record
is enough for B class items.

13. 4.Priority treatment
VIP treatment may be accorded to A items in all activities such as
processing of purchase orders, receiving, inspection, movement on the
shop floor, etc with an object to reduce lead time and average inventory.
No such treatment is necessary for B items. Normal plant procedures
should take care of inward and outward flow of these items.
No priority is assigned to C items.

14. 5.Safety stock
Safety stock should be less for A items.
It should be high for C items
It should not be too high or too low for B
items.

15. 6.Stores layout
A category items should be kept near issue point.
B items which are less active can be put slightly further
C items can be put in less accessible except those few
which have fallen in category C because of low unit price
and not because of their low consumption.

16. 7.Value analysis
To secure maximum benefits it
is essential to select those items
for value analysis which offer the
highest scope for cost reduction.
The ABC analysis is a helpful
step in this direction.

17. Purpose of ABC analysis
The object of carrying out ABC
analysis is to develop policy
guidelines for selective controls.
Normally, once ABC analysis has
been done, the following broad
policy guidelines can be established
in respect of each category.

18. A items B items C items
High consumption value moderate value low value
1.Very strict control moderate control Low control
2. No safety stock Low safety stock High safety stock
3. Frequent ordering Once in 3 weeks Once in 6 months
4. Weekly control Monthly control reports Quarterly control reports
statements
5. As many sources as Two or more reliable Two reliable sources for
possible for each item sources each item
6. Rigorous value analysis Moderate value analysis Minimum value analysis
7. Accurate forecast in Estimate based on past Rough estimates for
material planning data planning
8. Minimisation of waste Surplus and obsolete Annual review over
obsolete and surplus items surplus and obsolete
materials
9. Maximum efforts to Moderate efforts Minimum clerical efforts.
reduce lead time

19. Making ABC analysis
• Calculate rupee annual usage for each item in
inventory.
• Sort all items in descending order
• Prepare a table showing cost, no. of units etc
• Starting from the top compute the running
The entire process of total.
ABC analysis can be • Compute the cumulative percentage for the
summarized in item count and cumulative annual issue value.
following steps:

20. Advantages of ABC analysis
By concentrating on category A items
the material manager is able to
control inventories and show visible
results in a short span of time. By
controlling the A items and doing a
proper inventory analysis, obsolete
stocks are automatically pinpointed.

21. Limitations of ABC analysis
Some times even C category items
fall in A category. Like diesel in time
of power crisis.
Its very difficult to make the
calculation of that many items.