ABC analysis

What is ABC classification?

This is actually way for you to manage your inventory; you will come across this term in material management. As the name suggests you will classify your inventory based on the products you use as A, B and C where A will have items that typically consists of eighty percent of the total value, B will be the items that typically consists of fifteen percent of the total value, and C will contain the items that will typically consists of five percent of the total value. So based on the value of the objects and based on the need of the object you can prioritize the importance of the object and mange the inventory accordingly so that your production is never stopped because of shortage of resources for production to continue.

Some of the benefits of using ABC classification are:

• Manage the goods in the inventory in a proper manner
• You get to have a thorough knowledge about the amount and quantity of goods that might be needed
• You will be able to prioritize the importance of goods that are need in the production process.
• You will be able to identify the items that make a significant impact to the whole of the production process
• You will understand the true nature of the quality and quantity of the goods used in the production process.
• The production process will not be halted, even if there is a shortage of goods in the market. And in case you have established a good inventory then you will be able to manage your production process till you come up with alternate plans.
• In case of non availability of resources the goods available in your inventory will give you ample time to come up with alternate solutions.
• By calculating the quantity of goods that are needed to be kept in reserve you will also be able to save a lot of money by not ordering goods in excess quantity.

Questions:

• What are the benefits of using ABC classification?
• What are the criteria based on which materials are classified in ABC categories?