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.
- 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
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
Community Importance Rating