How can you use ABC analysis to classify inventory?

1 What is ABC analysis?

ABC analysis is a method of inventory classification that divides the items into three categories: A, B, and C. A items are the most valuable, B items are moderately valuable, and C items are the least valuable. The value of an item can be measured by its annual consumption value, which is the product of its unit cost and annual demand. Typically, A items account for a small percentage of the total inventory items, but a large percentage of the total inventory value. Conversely, C items account for a large percentage of the total inventory items, but a small percentage of the total inventory value. B items fall somewhere in between.

2 How to apply ABC analysis?

To apply ABC analysis to your inventory, you need to calculate the annual consumption value of each item, and rank them in descending order. You should then determine the cumulative percentage of the total inventory value and the total inventory items for each item. Assigning each item to one of the three categories is based on a predefined criterion, such as the 80/20 rule. This states that A items represent 20% of the total inventory items and 80% of the total inventory value, B items represent 30% of the total inventory items and 15% of the total inventory value, and C items represent 50% of the total inventory items and 5% of the total inventory value. However, you may choose other criteria based on your business objectives and constraints. It is important to review and update these categories periodically to reflect changes in demand, cost, or other factors.

3 What are the benefits of ABC analysis?

ABC analysis can be a powerful tool to help you improve your inventory management. It enables you to allocate resources and attention more effectively, focusing on the A items with the highest impact on profitability and customer service, and less on the C items with the lowest impact. Additionally, you can reduce inventory costs and risks by classifying inventory based on its value and optimizing inventory levels. Furthermore, ABC analysis can enhance decision making and performance measurement by providing insight into inventory performance and setting realistic goals and metrics for each category. Ultimately, ABC analysis can help you align your inventory strategy and planning with your business goals and customer expectations, allowing for better results in industrial engineering projects.

4 Here’s what else to consider

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