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ABC Analysis Inventory Control by Dhirendra

The ABC Analysis Inventory Control system categorizes inventory items into A, B, and C groups based on their value and consumption. Group A items, though small in number, account for the largest dollar investment (70%) and require the tightest control. Group B items account for the next largest investment (20%) and need moderate control. Group C items are numerous but account for just 10% of investment and require only ordinary control measures. This system allows firms to apply control procedures proportional to the inventory item's significance through dollar investment.

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dhirendra Kumar
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87 views

ABC Analysis Inventory Control by Dhirendra

The ABC Analysis Inventory Control system categorizes inventory items into A, B, and C groups based on their value and consumption. Group A items, though small in number, account for the largest dollar investment (70%) and require the tightest control. Group B items account for the next largest investment (20%) and need moderate control. Group C items are numerous but account for just 10% of investment and require only ordinary control measures. This system allows firms to apply control procedures proportional to the inventory item's significance through dollar investment.

Uploaded by

dhirendra Kumar
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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ABC Analysis Inventory Control

The ABC Analysis Control System is applied by those firms that have to maintain several types of
inventories. Ideally, it is not desirable to keep the same degree of control over all the inventory types,
since each vary in terms of its value of annual consumption.
-The ABC System of Inventory Control is based on the principle that a small portion of the items may
typically represent the bulk of money value of the total inventory used in the production process, while
a relatively large number of items may from a small part of the money value of stores. The money value
is ascertained by multiplying the quantity of material of each item by its unit price. According to this
approach to inventory control high value items are more closely controlled than low value items.
-A firm using the ABC system segregates its inventory into three groups – A, B and C. The A items are
those in which it has the largest dollar investment. A group consists about 10 percent of the inventory
items that account approximately for 70 percent of the firm’s dollar investment. These are the most
costly or the slowest turning items of inventory. The B group consists of the items accounting for the
next largest investment. This group consists approximately 20 percent of the items accounting for about
20 percent of the firm’s dollar investment. The C group typically consists of a large number of items
accounting for a small dollar investment. C group consists of approximately 70 percent of all the items of
inventory but accounts for only about 10 percent of the firm’s dollar investment. Items such as screws,
nails, and washers would be in this group.

Dividing its inventory into A, B, and C items allows the firm to determine the level and types of inventory
control procedures needed. Control of the A items should be most intensive due to the high dollar
investments involved, while the B and C items would be subject to correspondingly less sophisticated
control procedures.
A ITEMS
-Small in number, but consume large amount of resources
-Must have:
Tight control
Rigid estimate of requirements
Strict & closer watch
Low safety stocks
Managed by top management
B ITEMS
‡Intermediate
‡Must have:
Moderate control
Purchase based on rigid requirements
Reasonably strict watch & control
Moderate safety stocks
Managed by middle level management

C ITEMS
‡Larger in number, but consume lesser amount of resources
‡Must have:
Ordinary control measures
Purchase based on usage estimates
High safety stocks
ABC analysis does not stress on items those are less costly but may be vital
Steps in ABC Analysis of Inventory Control
The steps involved in ABC analysis are as follows:
1. Calculate the annual usage value of each item by multiplying the number used with the price of
the item.
2. Arrange the items in descending order according to the usage value.
3. Compute percentage of total usage value for each item.
4. Find out the average inventory of each item by dividing the usage value with 2 and number of
orders.
The ABC analysis can be shown on a graph too. For this purpose the cumulative percentages of the
number of items are shown on X-axis and percentage of values on F-axis. Where the plotted curve takes
a sharp turn a point is marked.
Advantages of ABC Analysis of Inventory Control
 It ensures control over the costly items in which a large amount of capital is invested.
 It helps in developing scientific method of controlling inventories. Clerical costs are considerably
reduced and stock is maintained at optimum level.
 It helps in maintaining stock turnover rate at comparatively higher level through scientific
control of inventories.
 It ensures considerable reduction in the storage expenses. It results in stock carrying stock.
 It helps in maintaining enough safety stock for C category of items.
Disadvantages of ABC System of Inventory Control
 This technique can be successfully employed only, if there is proper standardization of materials
in the store.
 A good system of codification of materials should be in operation for the success of this analysis.
 The analysis is based on monetary value of the items in use. Other important factors one
ignored.
In spite of the above mentioned limitations, the ABC analysis is very popular method of inventory
control. It is an effective instrument in reducing the cost of materials in the store house.

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