ABC Analysis for Inventory Management

1438 WordsOct 14, 20136 Pages
ABC analysis (Inventory) In supply chain, ABC analysis is an inventory categorization method which consists in dividing items into three categories, A, B and C: A being the most valuable items, C being the least valuable ones. This method aims to draw managers’ attention on the critical few (Aitems) and not on the trivial many (C-items). Prioritization of the management attention Inventory optimization is critical in order to keep costs under control within the supply chain. Yet, in order to get the most from management efforts, it is efficient to focus on items that cost most to the business. The Pareto principle states that 80% of the overall consumption value is based on only 20% of total items. In other words, demand is not…show more content…
4. Turnover ratios and associated inventory goals – By definition, “A” items will have greater usage than “B” or “C” items, and as a result should have greater turnover ratios. When establishing investment and turnover metrics, inventory data can be segregated by ABC classification, with different targets for each category. Definition of 'Inventory Turnover' A ratio showing how many times a company's inventory is sold and replaced over a period. the Periodic Review To make the most effective use of ABC classifications, the analysis should be completed at least on an annual basis, and more often as necessary. 4 Other Inventory Classification Techniques HML Classifications The High, medium and Low (HML) classification follows the same procedure as is adopted in ABC classification. Only difference is that in HML, the classification unit value is the criterion and not the annual consumption value. The items of inventory should be listed in the descending order of unit value and it is up to the management to fix limits for three categories. For examples, the management may decide that all units with unit value of Rs. 2000 and above will be H items, Rs. 1000 to 2000 M items and less than Rs. 1000 L items. The HML analysis is useful for keeping control over consumption at departmental levels, for deciding the frequency of physical verification, and for controlling purchases. VED Classification While in

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