ABC analysis is a business term used to define an inventoryation technique often used in material management
ABC analysis provides a mechanism for identifying items which will have a significant impact on overall inventory cost whilst also providing a mechanism for identifying different categories of stock that will require different management and controls
When carrying out an ABC analysis, inventory items are valued (item cost multiplied by quantity issued/consumed in period) with the results then ranked. The results are then grouped typically into three bands. These bands are called ABC codes.
“A class” inventory will typically contain items that account for 80% of total value, or 20% of total items.
“B class” inventory will have around 15% of total value, or 30% of total items. “C class” inventory will account for the remaining 5%, or 50% of total items.
ABC Analysis is similar to Praetor the “A class” group will typically account for a large proportion of the overall value but a small percentage of the overall volume of inventory.
The ABC classification process is an analysis of a range of objects, such as finished products, items lying in inventory or customers into three categories. It’s a system of categorization, with similarities to Pareto analysis, and the method usually categorizes inventory into three classes with each class having a different management control associated:
A – outstandingly important; B – of average importance; C – relatively unimportant as a basis for a control scheme.
Each category can and sometimes should be handled in a different way, with more attention being devoted to category A, less to B, and still less to C.
Popularly known as the “80/20” rule ABC concept is applied to inventory management as a rule-of-thumb. It says that about 80% of the Rupee value, consumption wise, of an inventory remains in about 20% of the items.
This rule , in general , applies well and is frequently used by inventory managers to put their efforts where greatest benefits , in terms of cost reduction as well as maintaining a smooth availability of stock, are attained.
What is the AX category of items of Inventory?
Inventory plays an important role for any organization as it blocks the working capital which otherwise would have earned the organization some money. While the need for having inventory can’t be denied for any running plant / machinery, its availability in controlled measures too is highly desirable. Control techniques such as ABC and XYZ analyses though done in different ways, try, at the same time, to get maximum control with little commitment of resources.
One of the ways to have still better (tight) control over the inventory with still less commitment of resources is by determining the AX category of items in a given inventory. Once ABC and XYZ analyses have been done and a list of A and X classes of items is drawn then AX category is a combination of the two categories. Going by the definition of A and X separately, AX category of items, normally, display a high consumption (A) as well as a high stock value (X). Essentially, these items are high value, in terms of overall procurement cost including their being costly. Obviously , the measures that need to be taken to keep AX inventory under control is similar to that of A or X items, viz stock less number at any given time, have tight consumption control, more sources so that supply doesn’t become a constraint when needed etc.