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ABC analysis is used in _______
- ABC analysis is an important concept in inventory control.
- ABC analysis deals with the classification of the items based on their intrinsic or market values and Controlling inventory costs money.
- In addition to this intrinsic value, there will be a nuisance value to the items/materials.
- The nuisance value is the cost associated with materials due to their absence/shortage.
ABC Analysis categorizes products based on importance. Importance can be deduced from cash flows, lead time, sales volume, etc. The ranking factor is chosen and inventory is classified into A, B & C types.
Once a ranking factor is chosen, products are placed in descending order of importance. The actual and cumulative total sales revenue percentages for each product are calculated.
The products leading to approximately 709% sales revenues are classified as 'A' type. Products that are responsible for the next 20%, i.e. 70% to 90% sales revenues are categorized as "B' type and remaining are of 'C' type.
There are different types of selective inventory control:
| ABC analysis(Always Better Control) | Inventory items are classified based on their annual usage value in monetary terms. |
Class A - item: 10 % of the item accounts 75% costs. Class B - item: 20% of the item accounts for 15% of costs. Class C - item: 70% of the item accounts for 10% of costs. |
| VED Analysis (Vital, Essential, Desirable) | Inventory items are classified on the basis of their criticality i.e. according to the cost of incurring a stock out |
V-Vital: Without which the production process would come to standstill E-Essential: Their non-availability will adversely affect the efficiency of the production system. It should be given second priority. D-Desirable: Without which the process is unaffected but is good if they are available for better efficiency. |
| SDE Analysis (Scarce, Difficult, Easily Available) | This type of analysis is useful in the study of those items which are scarce in availability |
S-Scarce: Imported items that are generally in short supply D-Difficult: These are available in market but not always traceable or immediately supplied E-Easily: Easily available in the market |
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HML Analysis (High, Medium, Low Cost)
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This type of analysis is similar to ABC analysis, except that cost per item is taken. |
H-Highest: Items whose unit cost is very high, or maximum are given top priority M-Medium: Items whose unit cost is of medium value L-Low: Items whose unit cost is low
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| FSND Analysis (Fast, Slow, Non-moving, Dead items) | Inventory items are classified in descending order of their usage (Consumption rate/ movement value). |
F-Fast moving items: That are consumed in short span of time N-Normal moving items: That are consumed over a period of one year S-Slow moving items: These items are not frequently issued and consumed over a period of two years or more. D-Dead items: Consumption of such items are almost nil. It can also be taken as obsolete items |