How to carry out an ABC analysis of inventory

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ABC analysis is a basic supply chain technique, often carried out by inventory controllers/materials managers, and is the starting point in inventory control.

A system of categorization, with similarities to Pareto analysis, the method usually categorizes inventory into three bands with each band having a different management control associated. Although different criteria may be applied to each category the typical method of “scoring” an inventory item is that of annual consumption value of said item (qty consumed X cost of item) with the result then ranked and then scored (A, B or C).

Bandings may be specific to the industry but typically follow a 70%, 90%, 100% banding in that A class items represent 70% of the value, B class items fall between 70% and 90% of the annual value with C class the remaining. In practical terms the complex high cost materials typically fall into the A class items, with the consumable, low cost (and typically fast moving) classed as C class.

Not all stock is equally valuable and therefore doesn’t require the same management focus. The results of the ABC analysis provide information that helps evaluate how each inventory part should be monitored and controlled. These controls are typically:

A class items which are critically important and require close monitoring and tight control – while this may account for large value these will typically comprise a small percentage of the overall inventory count.

B class are of lower criticality requiring standard controls and periodic reviews of usage.

C class require the least controls, are sometimes issues as “free stock” or forward holding.

In summary, ABC Analysis is the basis for material management processes and helps define how stock is managed. It can form the basis of various activity including leading plans on alternative stocking arrangements (consignment stock), reorder calculations and can help determine at what intervals inventory checks are carried out (for example A class items may be required to be checked more frequently than c class stores.