ABC Analysis: Definition
ABC analysis (or proportional parts value analysis) is a technique used to exercise control over materials based on their importance or value.
ABC Analysis: Explanation
Under this system, all items of material are classified into three categories—A, B, and C—according to their value.
Category A consists of 5% to 10% of the total items in the store and accounts for 70% to 85% of the total store value. Category B consists of 10% to 20% of the total items in the store and 10% to 20% of the store’s value.
Finally, category C consists of the remaining 70% to 85% of the total items and accounts for 5% to 10% of the store’s value.
As described above, category A covers items with a small quantity but high value; category B covers items with medium quantity and value; and category C covers items with high quantity but small value.
It’s worth noting that the percentages used above are only guidelines; these numbers are not fixed in practice. They can be modified based on the management’s needs.
Under the ABC analysis of materials, items of material that fall into category A must be closely controlled at all stages of handling, namely, purchasing, receiving, inspecting, storing, and issuing.
For items in category C, elaborate control procedures are not necessary. Therefore, the routines used for recording, purchasing, storing, and issuing materials can be simplified for these items.
The items under category B receive as much attention as items under category A but the frequency of purchases and issues are planned so as to keep them at the minimum.
Having described what ABC analysis entails, it’s noteworthy that the approach is also known as the Always Better Control method.
This is because it aims to ensure maximum control over materials and minimum cost of control through the equitable distribution of time, attention, and cost involved in material control with reference to value.
Advantages of A.B.C. Analysis
The main advantages of ABC analysis of materials include:
- Ensures closer control over expensive materials in which substantial capital may be locked
- Can reduce carrying costs.
- Ensures enough safety stock is kept for items in category C
- Enabled a high stock turnover rate to be maintained