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.
ABC analysis provides a mechanism for identifying items that will have a significant impact on overall inventory cost, whilst also providing a mechanism for identifying different categories of stock that will require different management and controls.
When carrying out an ABC analysis, inventory items are valued (item cost multiplied by quantity issued/consumed in period) with the results then ranked. The results are then grouped typically into three bands. These bands are called ABC codes.
- “A class” inventory will typically contain items that account for 80% of total value, or 20% of total items.
- “B class” inventory will have around 15% of total value, or 30% of total items.
- “C class” inventory will account for the remaining 5%, or 50% of total items.
ABC Analysis is similar to the Pareto principle in that the “A class” group will typically account for a large proportion of the overall value but a small percentage of the overall volume of inventory.
Another recommended breakdown of ABC classes:
- “A” approximately 10% of items or 66.6% of value
- “B” approximately 20% of items or 23.3% of value
- “C” approximately 70% of items or 10.1% of value
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