From Wikipedia, the free encyclopediaThe ABC analysis is a business term used to define an inventory categorization technique often used in materials management. It is also known as Selective Inventory Control. Policies based on ABC analysis:
- A ITEMS: very tight control and accurate records
- B ITEMS: less tightly controlled and good records
- C ITEMS: simplest controls possible and minimal records
The ABC analysis suggests that inventories of an organization are not of equal value.]Thus, the inventory is grouped into three categories (A, B, and C) in order of their estimated importance.
'A' items are very important for an organization. Because of the high value of these ‘A’ items, frequent value analysis is required. In addition to that, an organization needs to choose an appropriate order pattern (e.g. ‘Just- in- time’) to avoid excess capacity.
'B' items are important, but of course less important, than ‘A’ items and more important than ‘C’ items. Therefore ‘B’ items are intergroup items.
'C' items are marginally important.
ABC analysis categoriesThere are no fixed threshold for each class, different proportion can be applied based on objective and criteria. ABC Analysis is similar to the Pareto principle in that the 'A' items will typically account for a large proportion of the overall value but a small percentage of number of items.
Example of ABC class are
- ‘A’ items – 20% of the items accounts for 70% of the annual consumption value of the items.
- ‘B’ items - 30% of the items accounts for 25% of the annual consumption value of the items.
- ‘C’ items - 50% of the items accounts for 5% of the annual consumption value of the items.
- "B" approximately 20% of items or 23.3% of value
- "C" approximately 70% of items or 10.1% of value
ABC Analysis in ERP packageMajor ERP packages (SAP, Oracle, Microsoft, etc.) have built in function of ABC analysis. User can execute ABC analysis based on user defined criteria and system apply ABC code to items (parts). See detail at external link.
Example of the Application of Weighed Operation based on ABC classActual distribution of ABC class in the electronics manufacturing company with 4051 active parts.
|ABC class||Number of items||Total amount required|
- Uniform Purchase
|Uniform condition||Weighed condition|
|All items 4000|| Re-order point=2 week supply
|A-class items 200||Re-order point=1 week supply
|B-class items 400||Re-order point=2 week supply
|C-class items 3400||Re-order point=3 week supply
Delivery frequency=every 4 weeks
- Weighed Purchase
|ABC class||No of items||% of total value||Equal purchase||Weighed purchase||note|
|No of delivery in 4 weeks||average supply level||No of delivery in 4 weeks||average supply level|
|A||200||75%||800||2.5 weeks||800||1.5 weeksa||same delivery frequency, safety stock reduced from 2.5 to 1.5 weeksa, require tighter control with more man・hours.|
|B||400||15%||1600||2.5 weeks||800||3 weeks||increased safety stock level by 20%, delivery frequency reduced to half. Less man・hour required.|
|C||3400||10%||13600||2.5 weeks||3400||3.5 weeks||increased safety stock from 2.5 to 3.5 week supply, delivery frequency is one quarter. Drastically reduced man・hour requirement.|
|Total||4000||100%||16000||2.5 weeks||5000||1.925 weeks||average inventory value reduced by 23%, delivery frequency reduced by 69%. Overall reduction of man・hour requirement|