Question
Explain the concept of ABC Analysis.
✓
Answer
The ABC approach states that a company should rate items from A to C, basing its ratings on the following rules:
- A-items are goods which annual consumption value is the highest; the top 70-80% of the annual consumption value of the company typically accounts for only 10-20% of total inventory items
- B-items are the interclass items, with a medium consumption value; those 15-25% of annual consumption value typically accounts for 30% of total inventory items.
- C-items are, on the contrary, items with the lowest consumption value; the lower 5% of the annual consumption value typically accounts for 50% of total inventory items.
- Through this categorization, the supply manager can identify inventory which is more important and more profitable, and separate them from the rest of the items, especially those that are numerous but not that profitable.
- Find out the unit cost and the usage of each material over a given period.
- For each item calculate the total cost = Annual demand x Item cost per unit
- Arrange all items in a progressively decreasing order of the cost (descending value).
- Calculate and tabulate the cumulative total cost.
- Calculate percentage on total inventory in value and in number.
- Compute the individual items as a percentage of the total number of items
- Tabulate.
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