ABC classification, ABC analysis, Always better control

abc classyfiacation

1. ABC categorization in Inventory Nimantha Tharuka

2. What is Inventory? The systematic control and regulation of purchases, storage and usage materials to maintain an even flow of production and at the same time avoiding excessive investment in inventories. What is ABC analysis Always Better Control (based on cost criteria) Inventory categorization method which consists in dividing items into three categories (A, B, C) A being the most valuable items C being the least valuable items This method aims to draw managers’ attention on the critical few (A items) not on the trivial many (C items)

3. The Pareto Principle, or the 80/20 rule, states that for many phenomena 80% of the result comes from 20% of the effort. The Pareto Principle (80/20 Rule) Vilfredo Pareto 80% of car accidents are caused by 20% of young people 80% of lottery tickets are bought by 20% of society 80% of air pollution is caused by 20% of the population 80% of all firearms are used by 20% of the population 80% of all Internet traffic belongs to 20% of websites

4. Category A items The most important item of the company Accounts for only (10-25)% of the total inventory items Accounts for (70-80)% of the annual consumption value of the company. (which is the highest value) Have very tight inventory control Managed by the top-level Management Category B items Less important items than ‘A’ items but more important than ‘C’ items of the company Accounts for (25-30)% of the total inventory items Accounts for (15-25)% of the annual consumption value of the company Have intermediate inventory control Managed by middle level management

5. Category C items Marginally important items of the company Accounts for (45-50)% of the total inventory items Accounts for (5-10)% of the annual consumption value of the company Have low inventory control Managed by the middle and lower-level management Item A —  The top 15% represent 80 % of sales Item B —  The middle 20% represents 15 % of sales Item C —  The bottom 65% represent  5 % of sales

6. Total Sales % No of items

7. Steps for implementation of ABC analysis

8. Q1

9. A ( <= 80 ) B ( 81 – 95 ) C ( 96-100 ) Generally, We use for calculation

10. Q2

11. Advantages Control - Stocking a better mix of the right inventory allows a company to control over-supply and under-supply of important SKUs. Cost -Once a company has determined which items fall into each ABC category it can establish cost-reduction initiatives at the SKU level. Improved Services - Improvement in customer service levels and order fulfillment. ABC analysis provides a company with information to stock the right-mix of inventory. Warehousing -ABC analysis in warehousing helps maximize space utilization, improve efficiency, reduce holding costs, enhance visibility, and support informed decision-making. These advantages contribute to the overall efficiency and effectiveness of warehousing operations, ultimately benefiting the business's bottom line.

12. Shortcomings Proper standardization & codification of inventory items needed Considers only money value of items & neglects the importance of items for the production process or assembly or functioning Periodic review becomes difficult if only ABC analysis is recalled When other important factors make it obligatory to concentrate on "C" items more, the purpose of ABC analysis is defeated ABC analysis can also miss swings in demand for seasonal items or new items that haven’t accrued much sales volume data.

13. Thank You