ABC Inventory Management Techniques

ABC Inventory Management Tools and Techniques


ABC Inventory Management

ABC Inventory Management Technique with EOQ Model


ABC Inventory Management technique is also known as Selective Inventory Control. ABC Inventory Management is a categorization method that involve dividing items into three categories namely A, B, and C.

A consists the most valuable items and C the least valuable ones. A-items are under accurate records that are very tightly controlled. B-items are good records that are less tightly controlled while C-items have the simplest control and minimally controlled records.

ABC analysis gives mechanisms for establishing items with most significant impact on the inventory cost. ABC analysis also provides mechanism for identifying different categories of stock that require different management and controls. This method of analysis suggests that inventories of an organization are not equal in value. Therefore its main aim is to draw the attention of managers to the critical few A-items and not on many trivial C-items.

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The purpose of ABC Inventory Management Techniques

ABC analysis technique allows inventory management to separate and manage all suppliers into three categories. The process allows application of different inventory management techniques to different segments of suppliers with the aim of decreasing cost and increasing revenue.

Under this system A-items will usually consist approximately 15% to 20% of overall inventory items but with 80% value of the inventory. Paying close attention to these items leads to minimal increase in inventory management cost. B category consists 30% to 35% of items with about 15% inventory value. Items under this category can be managed by period inventory and with formal inventory system.

The C-items consist 50% of inventory items with 5% of inventory value. At most a relaxed inventory approach process is given to these items.


Basic steps in ABC Inventory Management

1.    The first step consists identification of the objective for the analysis and the success criteria. ABC analysis is capable of accomplishing one of the two primary goals. Therefore in order to reduce the cost of procurement and increase cash flow, the right items are made available for production or direct to customers.

2.    The second step involves collection of data on the inventory under analysis. Here the most available data is the annual expenses per item from standard accounting system already in place. The data may include raw purchases or weighted costs comprising all ordering costs.

3.    This step involves the segregation of inventory in decreasing order of impact. The process of sorting out inventory involves arranging items in the order of most important to the least important while ranking each by cost.

4.    At this step the accumulated impact is calculated. The cumulative impact of the inventory items list is done by dividing item annual cost by total inventory spend in a year and add the result to cumulative total of percentage spent.

5.    Then inventory is divided into buy classes. Though the process may not be as accurate as intended, it is advisable to take a holistic view. The main goal is to find areas that secures significant savings while ensuring in-sock availability of high-value items.

6.    Lastly analyze inventory classes and make right decisions. Your decisions must aim at follow-up and tracking. With strategic cost of management taken care of through categorization, periodic review can be done to ascertain success or failure of your decisions.


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