ABC Classification / Analysis

Click on the Photo to Subscribe to Our YouTube!

  ABC inventory classification is one of the most fundamental concepts of inventory management.  Many organizations use ABC inventory classification to assist with inventory management, sales of inventory and purchasing of inventory.  This classification system works by placing inventory into different categories.  ​

As implied those categories are typically defined by A level items, B level items and C level items or ABC items as the name suggests.  While there are many different classifications for the categories, the most common one used by organizations is based on annual dollar volume.  Keep in mind that every organization should decide what value may be added by different types of classification.  Some other types of classification are: 

• Annual usage or sales for each item.
• ​Unit Price of items.
• The percentage of the total usage or sales by item.
• Quality issues on items.
• Ranking of items from highest to lowest percentage.
• Shelf life of items.
• Classify the items into groups.

Once your classification categories are established then the classifications are broken down into A, B and C by their rankings.  For example:

• A CLASS ITEMS represent about 10% to 20% percent by numbers of items and 50% percent to 70% by projected dollar volume. 
• B CLASS ITEMS represent about 20% of the items and about 20% of the dollar volume.
• C CLASS ITEMS contain 60% to 70% of the items and represents about 10% to 30% of the dollar volume.

​Let’s look at a more specific example.  Let’s say we are classifying items by the total annual dollar of sales in decreasing order.  The A groups might be the 10% to 20% of items that make up 50% to 70% of the total annual dollar of sales.  The B group may be the 20% of items that make up about 20% of the total annual dollar of sales and the C group may contain the 60% to 70% of items that make up about 10% to 30% of the total annual dollar of sales.  As one might imagine a company would want to have strict controls on A class items and could apply looser controls on C class items.  Ultimately this enables a company to focus on what's important while still managing the other items.  

    Once an item has been classified a criteria of management is then established for each of the different classes.  For example:

• An A item's inventory would be counted more frequently than B and C items.
• A items may be stored in a more accessible location than B and C items.  
• The approval needed for ordering.  For example A items may need a checkpoint before they are purchased, while C items could be ordered freely.
• Forecasts for A items might be reviewed daily while B and C item forecasts may be reviewed less frequently.

Keep in mind that the criteria by which a company manages their classifications is specific to their needs.  With this in mind, every company should discuss their needs and decide.  The ones mentioned here may be a good starting point.  

It is important to note that there is no fixed numbers for each category.  Each organization should customize their classification system based on a pareto analysis. 
ABC Classification in Google Sheets

Click Here to Subscribe to Our YouTube Channel.

Discussion/Challenge:

1. What benefits can you see in applying tighter or looser controls to inventory management items?  Share your thoughts in the comments section below and receive a coupon to one of Lean Strategies International LLC's courses.

Click Here To Learn More About Item Level Inventory!