Organizations need to manage their inventory efficiently so as to reduce holding cost and carrying cost. ABC analysis is one of the many techniques used by organizations for inventory management. It is a tool to streamline inventory management and optimize operational efficiency by helping businesses concentrate efforts where they matter most.
In this technique the items of inventories are divided into three categories:
A of ABC Analysis (High value, Low quantity)
- These items represent a small percentage of total inventory but a large percentage of total inventory value.
- These items are closely monitored and require tight control, frequent reordering, and careful management.
- They generally represent around 10-20% of the items but contribute to 70-80% of the total value.
B of ABC Analysis (Moderate value, Moderate quantity)
- These items of inventories are of moderate importance. While they are not as valuable as A-items, they are more valuable than C-items and contribute a significant portion of the total value.
- These items usually require less frequent monitoring than A-items but still need regular attention.
- They typically represent around 20-30% of the items and contribute 15-25% of the value.
C of ABC Analysis (Low value,High quantity)
- These items of inventories often represent the majority of the inventory in terms of quantity but contribute the least to the overall value.
- These items can be managed with less frequent monitoring and less rigorous control.
- These items usually account for about 50-70% of the inventory items but contribute only 5-10% of the total inventory value.
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