ABC analysis divides an inventory into three categories-
- A items” with very tight control and accurate records,
- “B items” with less tightly controlled and good records, and
- “C items” with the simplest controls possible and minimal records.
‘A’ items are very important for an organization. Because of the high value of these ‘A’ items, frequent value analysis is required. In addition to that, an organization needs to choose an appropriate order pattern (e.g. ‘Just- in- time’) to avoid excess capacity. ‘B’ items are important, but of course less important than ‘A’ items and more important than ‘C’ items. Therefore ‘B’ items are intergroup items. ‘C’ items are marginally important.
- ‘A’ items–20% of the items accounts for 70% of the annual consumption value of the items.
- ‘B’ items – 30% of the items accounts for 25% of the annual consumption value of the items.
- ‘C’ items – 50% of the items accounts for 5% of the annual consumption value of the items.
- Another recommended breakdown of ABC classes:
- “A” approximately 10% of items or 66.6% of value
- “B” approximately 20% of items or 23.3% of value
- “C” approximately 70% of items or 10.1% of value
STEPS IN ABC ANALYSIS
- Identify all the materials required in construction project. Care should be taken that none of the item are missed.
- List all values as per their value.
- Arrange these items in a descending order on the basis of their respective consumption value.
- Express the annual usage value of each item as percentage of the total value of all items. i.e annual value of that item/summation of annual value of all items.
- Compute the cumulative percentage of annual consumption value.
- Obtain the percentage value of each item. If the number of items are 20, then each item would represent 100/20=5% of the total items. Also find the cumulative of these values.
- Draw a graph between percentage of items on X axis and annual percentage value on Y axis and mark cut off point where the slope of graph is changed.
In general case, it can be seen that 70% of the total inventory value cover 10% of total items i.e A group. Similarly 20 % of inventory value is covered by 20% of the Total items. i.e B group and remaining 10% of inventory value by bulk represents 70% of the total items i.e C group