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ABC

ABC Analysis

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

Community Importance Rating:
5.00
(one vote)

Process(es)

IDNameLevelx
P107Analyze Supply Chain Plan Deviations3P107
P205Analyze Source Plan Deviations3P205
P305Analyze Make Plan Deviations3P305
P405Analyze Delivery Plan Deviations3P405
D106Put Away3D106

Term(s)

IDNameClearx
FGFinished GoodsFG
INVInventoryINV
RMRaw MaterialRM
WIPWork-in-ProcessWIP
ABC Analysis 0 1 Analysis, ABC, Class, Classification, Inventory, Supply Chain, Stock, Planning The practice to classify inventory into 3 classes (A, B, and C) based on their run-rate or consumption rate