An ABC analysis is an analytical approach to inventory management.
The analysis aims to divide the inventory items into categories and then tries to identify the items that are most important.
Typically A is more important than B and B is more important than C and so on.
The criterion for the division can change depending upon what the company determines to be most important. For example, in a sales environment it could be based on sales value (volume) or it could be based on profitability per item.
Purpose of ABC Analysis
The purpose of this analysis to to be able to apply different policy settings for different inventory types.
For example, A class items may require a 95% availability (because you don’t want to be frequently out of stock of high volume or high profit items), B class 85% availability and C class 75% availability.
Using an ABC analysis provides a way to signal to both employees and customers the expectation of availability – sometimes referred to as ‘the customer promise’.
Based on the agreed values different levels of safety stock are held, with the implication that the overall inventory investment is skewed towards the products that sell and/or produce profit.
Why ABC Analysis Doesn’t Work with Most MRO
With MRO and spare parts inventory that is held for maintenance and operations support it is sometimes suggested that an ABC analysis be based on stock turn (see separate entry).
However, in this author’s opinion this is of little value because slow moving items (hence with a low stock turn) may be critical to the operation.
The analysis cannot be based on value because sometimes low cost items are critical to the operation.
For these reasons the use of ABC analysis is not recommended for MRO and engineering inventory.
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Posted by: Phillip Slater