ABC Analysis for Stores Organization & Inventory Control Management

Inventory control and Stores organization constitutes a major management discipline which is designed to ensure the optimum total inventory’s holding cost at the satisfied delivery level. A properly managed store’s system will assure:

? Prevent frequent ordering of items

? Avoid ordering of items in non-optimal batch quantity

? Streamline the system of procurement

? Take advantage of the price reduction and discounts

? Avoid Stagnation of items

? Support for unique short codification to store’s item for easy locate them

? Periodical disposal of obsolete items

? Evaluate an optimal procedure for ordering and storing of slow moving items

? Evaluate an optimal procedure for ordering and storing of regular consumption

? Monitor the stock levels as frequently as possible

? Minimum inventory with minimum stock-out situations

? Make inventory system an integral part of the total Management Information System

For any manufacturing business, money is locked in the form of raw material, semi-finished, finished goods, stock of spares and consumables and etc.,

Over stocking will directly reduce the working capital. Less held will disturb the smooth process flow, affect production output and production cost. Poorly managed inventory leads to revenue loss and business failures. ‘Effective management’ on these holding items is vital to any organization.

ABC analysis is of the best choice for controlling and managing the Stores and Spares stock items. By applying ABC analysis with the immediate historical data available to the company, it is evident to optimize the inventory holding cost.

What is ABC analysis?

With use of historical consumption data of a company, it is possible to differentiate and segregate high valued fast moving items from medium valued average moving items and low valued slow moving items. Simply with data, the data analytic can decide ABC groups as given below:

ABC Analysis is one of the best approaches to segment the stock in different controllable group.

Group A:

The top 5% to 10% of items which accounts for the highest value of the total inventory value.

Group B:

The next 10% to 20% of the items which accounts for a moderate share of the total inventory value.

Group C:

The remaining large group of stock items will account for small fraction of the total inventory value.

The above chart is an example only. The percentages of values and the percentages of the items of A B C groups will vary based on the historical data considered for the period and based on the business vertical’s consumption pattern.

Minimum 1 year recent past data is always good for analysis.

Additionally, before proceeding with A B C analysis, there is a critical but an essential work available in front of the Analyst to find and remove the Non-Moving items from the item’s list.

The main objective of such a classification A B C is to separate out the third group that is C group which is large in numbers and so potentially require a large number of record keeping efforts and attention but relatively unimportant from the point of keeping inventory investment at even reasonable level. These items are characteristically low unit valued items with low usage rate.

After classifying with ABC analysis, it is good to apply Two Bin system (or Reorder level system) for A and B group items. The Minimum stock, maximum stock, reorder level (ROL), safety stock (SS), Economic ordering quantity (EOQ) and ordering cost are some of the essential components of Two Bin System to optimally control the items of group A and B, which are fast moving items.

For C group items, review period system could be followed. The company can fix a review period, say 6 months once the stock and movement of C Group items can be reviewed and according new purchases can be initiated to avoid stock out situations.

Hence the stores activities will be fully streamlined with minimum inventory holding cost and the best delivery model.

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