What is ABC Analysis

What is ABC Analysis and Why it is used

What is ABC Analysis? The answer of the question falls in Inventory – Maintaining Inventory is the most challenging...

What is ABC Analysis? The answer of the question falls in Inventory of Raw Material, Finished goods, Store and Spares etc. Maintaining Inventory is the most challenging job and pain area of all the organizations. Mainly the organizations, which are engaged in manufacturing process, use this principle to handle their Inventory. Any manufacturing plant which is producing a huge quantity of Finish goods, normally faces the problem of dead inventory. Dead Inventory is the most dangerous segment where a huge portion of profit sucked in, in  the form of unused inventory.

            There are many Inventory handling solutions available in the market. Many small to large ERPs are available which cater it very effectively.  Now a days most of the Industries are using such solutions but the worrying part is this, very few are using it religiously and controlling the stock effectively.

            Why, the reason of not able to manage solution properly? The answer is, these Industries have not done a good home work while implementing the solutions.

What is 80 : 20 Principle in ABC analysis

     In 19th century an Italian economist named Vilfredo Pareto gave The Pareto Principle to handle Inventory in manufacturing plants. This is also known as 80:20 principle. It suggests –

  • 20% Inventory items costs is almost 80% of total Inventory cost
  • 30% Inventory items costs is almost 15% of total Inventory cost
  • 50% Inventory items costs is almost 5% of total Inventory cost

It means, there are only 20% items in stock that costs as much as 80% of the total Inventory cost. Hence if Organizations are able to control with check points to these 20% items will be able to effectively saving huge manufacturing cost.

Item Classification based on ABC Analysis

For further analysis Pareto classified above items in three categories, named – A,B, C.

A         –           20% High Cost Items

B         –           30% Medium Cost Items

C         –           50% Very Low Cost items

It has been seen, industries normally struggles and waste time in managing Class – B and C items rather than Class – A items.

Class – A Items

            Raw Material, Capital item, Costly spares, electrical panels etc are the class-A items. If these items are managed strategically with intelligent analysis, Organizations can save a good chunk of money.

Class – B Items

Machine Spares like costly bearings, belts and some consumables like fuels and lubricants etc falls under this category. These are the items which are commonly misused. Common causes of misuse are –

  • Replaced item which is still in working condition
  • On shop floor no procedural guidelines to analyze rejected material
  • Keeping parallel inventory by maintenance staff to be used in odd hour but unfortunately that odd hour never comes.  It has also been seen that when the item such item requirement generated, department  raise another request for the material.
  • No preventive maintenance guidelines available and wait for breakdown
  • Procurement on short notice

This class – B can be considered as the most sensitive area in terms of leakage and costing parameters.

Class – C Items

Items of very low costing like washers, nut bolts, stationary and many more almost 50% of total items in stock falls in this category. Due to large numbers, generally store controllers put all their efforts in managing and controlling these items. Time to time physical verification of such material is wastage of energy and resources.