Difference between revisions of "ABC"

Latest revision as of 01:35, 22 August 2020

ABC Analysis or A-B-C Analysis is a Term describing the Practice to classify Inventory into classes based on their run-rate or consumption rate. The purpose of inventory classification is to create different policies, processes and procedures for each class based on the 'importance' of each class - differentiating the critical few from the trivial many.

• Class A - Small number of products that represent top 10% of volume and 70% of value. These products are typically frequently planned, tightly controlled, securely stored, and/or audited.
• Class B - Products representing next 20% of volume and 20% of value and are less frequent managed. Class B inventory is typically closely monitored for reclassification to A or C.
• Class C - Large number of products with relative low value. Run-rates are the bottom 70% of volume, representing 10% of value. These products may be infrequently managed.

ABC Analysis is a derivative of pareto analysis. The percentages for A, B, and C differs by industry, business, and/or product.

Use Cases

• Managing working capital - Inventory reduction programs
• Inventory optimization programs - Addressing excess and obsolete inventories, and product stockouts)
• Inventory/Supplier management
• Planning parameters determination - See plan deviation analysis processes (P107, P205, P305, P405)
• Shrinkage prevention

Notes

Benefits of ABC Analysis

• Focus on those products that have highest impact on working capital
• Limits risk of administrative burdens for low risk/value products
• Adoption by service industries as a profitability analysis instrument (based on number of transactions)

Criticisms of ABC Analysis

• Materials are not evaluated on criticality
• Inventory may need to reclassification periodically
• Materials are not evaluated on frequency of inventory movements
• Risk of over-emphasis on Class A products

Raw Material Work-in-Process Finished Goods

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