ABC analysis
Encyclopedia
The 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. it stands for Always Better 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 provides a mechanism for identifying items that will have a significant impact on overall inventory cost, while also providing a mechanism for identifying different categories of stock that will require different management and controls.
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.
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
Another recommended breakdown of ABC classes:
packages (SAP
, Oracle, 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.
Using this distribution of ABC class and change total number of the parts to 4000.
When you apply equal purchasing policy to all 4000 components, example weekly delivery and re-order point (safety stock) of 2 week supply assuming that there are no lot size constraints, the factory will have 16000 delivery in 4 weeks and average inventory will be 2.5 week supply.
In comparison, when weighed purchasing policy applied based on ABC class, example C class monthly (every 4 week) delivery with re-order point of 3 week supply, B class Bi-weekly delivery with re-order point of 2 weeks supply, A class weekly delivery with re-order point of 1 week supply, total number of delivery in 4 weeks will be (A 200x4=800)+(B 400x2=800)+(C 3400x1=3400)=5000 and average inventory will be (A 75%x1.5weeks)+(B 15%x3weeks)+(C 10%x3.5weeks)=1.925 week supply.
a) A class item can be applied much tighter control like JIT
daily delivery. If daily delivery with one day stock is applied, delivery frequency will be 4000 and average inventory level of A class item will be 1.5 days supply and total inventory level will be 1.025 week supply. reduction of inventory by 59%. Total delivery frequency also reduced to half from 16000 to 8200.
By applying weighed control based on ABC classification, required man-hours and inventory level are drastically reduced.
Inventory
Inventory means a list compiled for some formal purpose, such as the details of an estate going to probate, or the contents of a house let furnished. This remains the prime meaning in British English...
categorization technique often used in materials management
Materials management
Materials management can deal with campus planning and building design for the movement of materials, or with logistics that deal with the tangible components of a supply chain...
. It is also known as Selective Inventory Control. it stands for Always Better 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 provides a mechanism for identifying items that will have a significant impact on overall inventory cost, while also providing a mechanism for identifying different categories of stock that will require different management and controls.
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 categories
There are no fixed threshold for each class, different proportion can be applied based on objective and criteria. ABC Analysis is similar to the Pareto principlePareto principle
The Pareto principle states that, for many events, roughly 80% of the effects come from 20% of the causes.Business-management consultant Joseph M...
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.
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
ABC Analysis in ERP package
Major ERPEnterprise resource planning
Enterprise resource planning systems integrate internal and external management information across an entire organization, embracing finance/accounting, manufacturing, sales and service, customer relationship management, etc. ERP systems automate this activity with an integrated software application...
packages (SAP
SAP ERP
The SAP ERP application is an integrated enterprise resource planning software manufactured by SAP AG that targets business software requirements of midsize and large organizations in all industries and sectors...
, Oracle, 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 class
Actual distribution of ABC class in the electronics manufacturing company with 4051 active parts.| ABC class | Number of items | Total amount required |
|---|---|---|
| A | 5％ | 75％ |
| B | 10％ | 15％ |
| C | 85％ | 10％ |
| Total | 100％ | 100％ |
Using this distribution of ABC class and change total number of the parts to 4000.
- Uniform Purchase
When you apply equal purchasing policy to all 4000 components, example weekly delivery and re-order point (safety stock) of 2 week supply assuming that there are no lot size constraints, the factory will have 16000 delivery in 4 weeks and average inventory will be 2.5 week supply.
| Uniform condition | | Weighed condition | ||
|---|---|---|---|
| Items | Conditions | Items | Conditions |
| All items 4000 | Re-order point=2 week supply Delivery frequency=weekly |
A-class items 200 | Re-order point=1 week supply Delivery frequency=weekly |
| B-class items 400 | Re-order point=2 week supply Delivery frequency=bi-weekly |
||
| C-class items 3400 | Re-order point=3 week supply Delivery frequency=every 4 weeks |
||
- Weighed Purchase
In comparison, when weighed purchasing policy applied based on ABC class, example C class monthly (every 4 week) delivery with re-order point of 3 week supply, B class Bi-weekly delivery with re-order point of 2 weeks supply, A class weekly delivery with re-order point of 1 week supply, total number of delivery in 4 weeks will be (A 200x4=800)+(B 400x2=800)+(C 3400x1=3400)=5000 and average inventory will be (A 75%x1.5weeks)+(B 15%x3weeks)+(C 10%x3.5weeks)=1.925 week supply.
| 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 |
a) A class item can be applied much tighter control like JIT
JIT
JIT may refer to:* Various meanings of Just In Time:** Just-in-time compilation - a technique for improving the performance of virtual machines in computing.** Just-in-time - a business inventory strategy.* Jabber ICQ Transport....
daily delivery. If daily delivery with one day stock is applied, delivery frequency will be 4000 and average inventory level of A class item will be 1.5 days supply and total inventory level will be 1.025 week supply. reduction of inventory by 59%. Total delivery frequency also reduced to half from 16000 to 8200.
- Result
By applying weighed control based on ABC classification, required man-hours and inventory level are drastically reduced.
External Links
- SAP library ABC Analysis
- Oracle Overview of ABC Analysis