INVENTORY CONTROL TECHNIQUE

ABC ANALYSIS

ABC ANALYSIS - 1
One of the most important considerations of control is the value of annual consumption of inventory items in a year. Only a small number of inventory items consume a very large share of inventory consumption during the year. A little larger number of inventory items covers a moderate share of annual inventory consumption. A very large number of items just cover a very small share of annual inventory consumption. These facts gave birth to the concept of ABC analysis. 2

ABC ANALYSIS - 2
It has been observed that in an industrial unit only 10% of items have 70% of the annual inventory consumption, 20% of the items have 20% of annual inventory consumption, and 70% of the items have only 10% of the annual inventory consumption. Since 70% of the annual consumption of inventory is covered by only 10% of the items in the inventory, these items deserve highest attention and are classified as A items. Similarly 20% of the items covering 20 % of the inventory investment are B class items Balance 70% of the inventory items are termed as C class items. 3

STEPS IN ABC ANALYSIS

The steps in computing ABC analysis are: a Determine the annual usage in units for each item for the past one-year. b. Multiply the annual usage quantity with the average unit price of each item to calculate the annual usage in US$ for each item. c. Item with highest dollar usage annually is ranked first. Then the next lower annual usage item is listed till the lowest item is listed in the last. d. Table 1 shows ranks of the items according to the annual usage in US$. for 10 items. e. Arrange the items in the inventory by cumulative annual usage (dollars) and by cumulative percentage. Categorize the items in A, B , and C categories. 4

TABLE 1: DETERMINATION OF RANKS BY ANNUAL USAGE IN US$

Item # 1 Average usage (units) 17 Unit cost (US$) 2.5 Annual usage (US$) Rank

2
3 4 5 6 7 8 9 10

50
15 25 5 50 153 20 16 17

17
15 17 17 119 5 2.125 2.656 2.5
5

TABLE 1: DETERMINATION OF RANKS BY ANNUAL USAGE IN US$

Item # 1 Average usage (units) 17 Unit cost (US$) 2.5 Annual usage (US$) 42.5 Rank

2
3 4 5 6 7 8 9 10

50
15 25 5 50 153 20 16 17

17
15 17 17 119 5 2.125 2.656 2.5

850
225 425 85 5950 765 42.5 42.5 42.5
6

TABLE 1: DETERMINATION OF RANKS BY ANNUAL USAGE IN US$

Item # 1 Average usage (units) 17 Unit cost (US$) 2.5 Annual usage (US$) 42.5 Rank 8

2
3 4 5 6 7 8 9 10

50
15 25 5 50 153 20 16 17

17
15 17 17 119 5 2.125 2.656 2.5

850
225 425 85 5950 765 42.5 42.5 42.5

2
5 4 6 1 3 7 9 10
7

TABLE 2:CATEGORIZING THE ITEMS IN ABC RANKING

Item # 6 2 7 Annual Cumulative annual usage (US$) usage (US$) 5950 850 765 5950 6800 7565 Annual usage % Category assigned

4
3 5 8

425
225 85 42.5

7990
8245 8330 8372.5

1
10 9 Total

42.5
42.5 42.5 8500

8415
8457.5 8500
8

TABLE 2:CATEGORIZING THE ITEMS IN ABC RANKING

Item # 6 2 7 Annual Cumulative annual usage (US$) usage (US$) 5950 850 765 5950 6800 7565 Annual usage % 70 80 89 Category assigned

4
3 5 8

425
225 85 42.5

7990
8245 8330 8372.5

94
97 98 98.5

1
10 9 Total

42.5
42.5 42.5 8500

8415
8457.5 8500

99
99.5 100
9

TABLE 2:CATEGORIZING THE ITEMS IN ABC RANKING

Item # 6 2 7 Annual Cumulative annual usage (US$) usage (US$) 5950 850 765 5950 6800 7565 Annual usage % 70 80 89 Category assigned A B B

4
3 5 8

425
225 85 42.5

7990
8245 8330 8372.5

94
97 98 98.5

C
C C C

1
10 9 Total

42.5
42.5 42.5 8500

8415
8457.5 8500

99
99.5 100

C
C C
10

TABLE 3: ABC CATEGORY SUMMARY

category Item# % of items in inventory $ in the % $ in the category category

A
B C Total

6
2, 7 1, 3, 4,5,8,9,10 10

10
20 70 100

5950
1615 935 8500

70
19 11 100

11