ABC analysis underlines a very important principle “VITAL FEW – TRIVIAL MANY”. Statistics reveal that just a handful of items account for bulk of the annual expenditure on materials. These few items, called “A” items, therefore, hold the key to business. The other items, known as B and C items, are numerous in number, but their contribution is less significant. ABC analysis thus tends to segregate all items into 3 categories: A, B and C on the basis of their annual usage. The categorization so made enables one to pay the right amount of attention and minimum of effort and expenditure as merited by the item.
The annual consumption analysis of any organization would indicate that a handful of top high value items less than 10% of the total number will account for a substantial portion of about 75% of the total consumption value and such vital few items are called ‘A’ items which need careful attention of the materials managers. Similarly, a large number of “bottom” items over 70% of the total consumption of units, are called trivial many account only for about 10% of the consumption value, are known as ‘C’ class. The items which lie between the top and bottom are called ‘B’ category items.
Application of ABC Analysis:
This approach helps the materials manager to exercise selective control and focus his attention only on a few items when he is confronted with lakhs of stores items. Any sound stock control system should ensure that every item gets right amount of attention, at the right time. ABC analysis makes it possible with considerably less effort its selective approach. The following are the applications of ABC analysis.
Degree of Control:
‘A’ class items form a substantial part of total consumption in rupees and so it must draw our attention. Up to date and accurate and accurate records should be maintained for these times. The inventory should be kept at a minimum by putting blanket orders covering annual requirements and then arranging frequent deliveries from vendors.
‘B’ class items should have normal or moderate control made possible by good records and regular attention.
A little or no control is required for ‘C’ class items. Large inventories should be maintained to avoid stock outs.
‘A’ class items require careful and accurate determination of order quantities and order points based on exact requirements. They should be subjected to frequent reviews to reduce possibility of overstocking.
A reasonably good analysis for order quantities an order points is required for ‘B’ items but the stock may be reviewed less frequently or only when major changes occur.
No such computations are required for ‘C’ items. These items should be brought in bulk, may be for the full year.
Detailed records of goods reserved, received, ordered, issued and on hand need to be maintained for ‘A’ category of items. Tight and accurate controls are required for such items.
No such detailed records are necessary for the ‘C’ class items
Any routine method that ensures good and accurate records is enough for ‘B’ class items.
VIP treatment may be accorded to ‘A items in all activities such as processing of purchase orders, receiving, inspection, movement on the shop floor etc with an object to reduce lead time and average inventory.
No such treatment is necessary for ‘B’ items. Normal plant procedures should take care of inward and outward flow of those items.
No priority is assigned to ‘C’ items.
All the items are equally important from production point of view. Shortage of a few paise bolt may be one of the causes for stopping the production process and which may cost heavily. Shortage may occur even when accurate and realistic order points have been computed. Safety stock is provided to safeguard against these shortages.
Safety stock should be less for ‘A’ items. The possibility of stock outs can considerably be cut down by closer forecasting, frequent reviewing and more processing.
C items on the contrary, should have sufficient safety stock to eliminate progressing and reduce the cost probability of stock outs.
A moderate policy is required for ‘B’ items. Safety stock should neither be too high or too low.
The following can be an indication for safety stock for 3 categories of items:
A items : ½ month stock
B ” : 1 ” ”
C ” : 2 ” ”