ABC Analysis is a common approach for prioritizing, classifying, or categorizing inventory management techniques. Classification is usually based on price or cost times usage or consumption volume. Typically ‘A Items’ are the highest dollar volume and represent 5 to 10% of the items and 50 to 70% of the total dollar volume. The ABC Analysis Principle is that A items are treated differently than C items. A Items might be counted more frequently and have different planning parameters, higher inventory turns, higher safety stock and customer service levels.
- Make a list of part numbers
- Determine total quantity used over some period of time
- Obtaining the cost for each part
- Calculate usage $ value for each part by multiplying the quantity and the cost
- Sort the list from high to low $
- Calculate the total usage $ value for all items
- Calculate each item’s percent of total usage $ value
- Select percentage cut offs for each ABC group, for example:
Here’s an example …
Once you have classified your parts you can use this data to drive key materials management activities. For example, coordinating your perpetual inventory cycle counting program – you might routinely verify your Category A parts on a monthly basis but only review your category C parts twice a year.
You might use flow orders, kanban, or VMI for your C parts but require detailed negotiated purchase orders for your A parts.
In a warehouse you might want to be sure the A items are near the shipping dock and the C items are toward the back.
You might even want to take a close look at the C items and purge a few.
The main point is – one size doesn’t fit all parts, choose the materials management approach that best serves each inventory category.