The ABC Classification method separates inventory items into three categories based on their value and usage. Class A items comprise the highest value but lowest quantity, making up 15% of total inventory items but 71% of total value. Class B items are next in value and quantity, representing 25% of total items and 16.5% of total value. Class C items have the lowest per-item value but highest quantity, comprising 60% of total items but only 12.5% of total value. This classification determines the appropriate level of control and monitoring applied to each inventory item.

1. The ABC Classification BOBADILLA.ZATARAIN

3. Typically, thousands of independent demand items are held in inventory by the company BUT A small percentage is of such a high dollar value to warrant close inventory control.

7. 5 – 10 % of valueCopyright 2006 John Wiley & Sons, Inc. 12-4 Classification of inventory items

8. THE HIGHER THE VALUE OF THE INVENTORY, THE TIGHTER THE CONTROL.

10. List the items according to their annual money usage.

11. Calculate the percent of total value (Value/Total Value x100)

12. Calculate the percent of total quantity (Annual usage/Total Annual Usage x 100)

13. Compute the cumulative percentage of items.Examine the annual usage distribution and group the items into A, B, and C groups based on percentage of annual usage..

14. ABC Classification: Example The maintenance department for a small manufacturing firm has responsibility for maintaining an inventory of spare parts for the machinery it services. The parts inventory, unit cost and annual usage are as follows:

15. ABC Classification: Example 1 $ 60 90 2 350 40 3 30 130 4 80 60 5 30 100 6 20 180 7 10 170 8 320 50 9 510 60 10 20 120 PART UNIT COST ANNUAL USAGE

16. ABC Classification: Example The department manager wants to classify the inventory parts according to the ABC system to determine which stocks of parts should most closely be monitored.

17. Solution: 1 $ 60 90 2 350 40 3 30 130 4 80 60 5 30 100 6 20 180 7 10 170 8 320 50 9 510 60 10 20120 1430 1000 Determine the annual usage for each item. PART UNIT COST ANNUAL USAGE

19. List the items according to their annual money usage.

20. Calculate the percent of total value (Value/Total Value x100)

21. Calculate the percent of total quantity (Annual usage/Total Annual Usage x 100)

23. TOTAL % OF TOTAL % OF TOTAL PART VALUE VALUE QUANTITY % CUMMULATIVE PART UNIT COST ANNUAL USAGE 9 $30,600 35.9 6.0 6.0 8 16,000 18.7 5.0 11.0 2 14,000 16.4 4.0 15.0 1 5,400 6.3 9.0 24.0 4 4,800 5.6 6.0 30.0 3 3,900 4.6 10.0 40.0 6 3,600 4.2 18.0 58.0 5 3,000 3.5 13.0 71.0 10 2,400 2.8 12.0 83.0 7 1,700 2.0 17.0 100.0 $85,400 1 $ 60 90 2 350 40 3 30 130 4 80 60 5 30 100 6 20 180 7 10 170 8 320 50 9 510 60 10 20 120 71.0 15.0 25.0 18.6 12.5 60.0

24. ABC CLASSIFICATION % OF TOTAL % OF TOTAL CLASS ITEMS VALUE QUANTITY A 9, 8, 2 71.0 15.0 B 1, 4, 3 16.5 25.0 C 6, 5, 10, 7 12.5 60.0