ABC classification is a system of categorization, with similarities to Pareto analysis and the method usually categorizes inventory into three classes with each class having a different management control associated.
Although different criteria may be applied to each category the typical method of �scoring� an inventory item is that of annual consumption value of said item (Qty consumed X Cost of item) with the result then ranked and
then scored (A, B or C). Classification may be specific to the industry but typically follows a 70%, 90%, 100% banding in that A class items represent 70% of the value, B class items fall between 70% and 90% of the annual value with C class the remaining. In practical terms the complex high cost materials typically fall into the A class items, with the consumable, low cost (and typically fast moving) classed as C class.
How to carry out the actual analysis ?
Carrying out ABC analysis is a bit tricky affair. What ultimately is done is to segregate all the inventory items into three categories viz. A, B C.
ABC analysis can be done for any given data that has money value as the prime factor.
For example classification of pending suppliers’ bills, items of an MRO or any type of inventory ,expenditure over a period of time, customers with respect to sale value etc. Let us take a typical example of inventory which we want to classify into A,B C classes in respect to items.
Procedural steps :
1. First of all, collect all the data of the inventory and calculate the consumption or sale value. For a Stores, maintaining inventory, this shall be Quantity issued X unit rate of an item, say x1. Similarly. get the values for all the remaining items, say. x2,x3,x4. x100 in the following way :