ABC Analysis for Inventory Management Essay example

1450 Words Sep 30th, 2013 6 Pages
ABC analysis (Inventory)
In supply chain, ABC analysis is an inventory categorization method which consists in dividing items into three categories, A, B and C: A being the most valuable items, C being the least valuable ones. This method aims to draw managers’ attention on the critical few (Aitems) and not on the trivial many (C-items).

Prioritization of the management attention
Inventory optimization is critical in order to keep costs under control within the supply chain. Yet, in order to get the most from management efforts, it is efficient to focus on items that cost most to the business.
The Pareto principle states that 80% of the overall consumption value is based on only 20% of total items. In other words, demand is not
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In practice, sales volume is not the only metric that weighs the importance of an item. Margin but also the impact of a stock-out on the business of the client should also influence the inventory strategy.
Procurement and Warehouse Applications
The results of an ABC Analysis extend into a number of other inventory control and management processes:
1. Review of stocking levels – As with investments, past results are no guarantee of future performance. However, “A” items will generally have greater impact on projected investment and purchasing spend, and therefore should be managed more aggressively in terms of minimum and maximum inventory levels.Obsolescence review – By definition, inactive items will fall to the bottom of the prioritized list. Therefore, the bottom of the
“C” category is the best place to start when performing a periodic obsolescence review.
2. Cycle counting – The higher the usage, the more activity an item is likely to have, hence the greater likelihood that transaction issues will result in inventory errors. Therefore, to ensure accurate record balances, higher priority items are cycle counted more frequently.
Generally “A” items are counted once every quarter; “B” items once every 6 months; and
“C” items once every 12 months.

3. Identifying items for potential consignment or vendor stocking – Since “A” items tend to have a greater impact on investment, these would be the best

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