ABC Inventory Control

In inventory control, four characteristics must be determined:

the relative importance of the inventory items,
the control mechanism,
the reorder quantity
the reorder time.

In inventory systems, only a small number of items presents the most critical values. ABC inventory control separates the most significant items from the less important. It is used to determine the degree and level of control used.

ABC Classification

Under the ABC inventory control policy, inventory items are classified into 3 groups or items:

A items: these are the 20% of the items that tie up 80% of the total inventory money.
B items: these are the 30% of the items that tie up 15% of the total inventory money.
C items: these are the 50% of the items that tie up 5% of the total inventory money.

The ABC Classification Process

First, establish the item characteristics that influence the results of inventory management. Such characteristics include:

Annual money usage
Scarcity of material
Quality problems

Second, classify items into groups based on the criteria established.

Third, apply a degree of control in proportion to the importance of the group.

Procedure of ABC classification

The procedure of the ABC inventory control classification is summarized in the following steps:

Determine the annual usage for each item.
Multiply the annual usage of each item by its cost to get its total annual money usage.
List the items according to their annual money usage.
Calculate the cumulative annual money usage and the cumulative percentage of items.
Examine the annual usage distribution and group the items into A, B, and C groups based on percentage of annual usage..

An Application

Take the inventory sheet that shows the annual unit usage and unit cost:

Part number	Annual unit usage	Unit cost	Annual money usage
1	1,100	2	2,200
2	600	40	24,000
3	100	4	400
4	1,300	1	1,300
5	100	60	6,000
6	10	25	250
7	100	2	200
8	1,500	2	3,000
9	200	2	400
10	500	1	500

The total annual money usage is 38,250 riyals.

We sort the items based on their annual money usage, going from the highest to the lowest:

Part number	Annual unit usage	Unit cost	Annual money usage	Cumulative usage	Cumulative percent usage	Cumulative percent of items
2	600	40	24,000	24,000	63	10
5	100	60	6,000	30,000	78	20
8	1,500	2	3,000	33,000	86	30
1	1,100	2	2,200	35,200	92	40
4	1,300	1	1,300	36,500	95	50
10	500	1	500	37,000	97	60
3	100	4	400	37,400	98	70
9	200	2	400	37,800	99	80
6	10	25	250	38,050	99	90
7	100	2	200	38,250	100	100

In the ABC classification, group A includes items that hold up about 80% of the total inventory money. To identify these items, we look down in the table under the 'Cumulative percent usage' column and add items to group A until we reach 80 or slightly above or below it. In the table above, group A should include items 2 and 5, which represent 20% of the total inventory items.

Group B includes items that hold up about 15% of the total inventory money. We can remove the items in group A from the table. The cumulative percent usages are adjusted by subtracting from them the cumulative percentage usage of the last item in group A:

Part number	Annual unit usage	Unit cost	Annual money usage	Cumulative usage	Cumulative percent usage	Cumulative percent of items
8	1,500	2	3,000	3,000	8	10
1	1,100	2	2,200	5,200	14	20
4	1,300	1	1,300	6,500	17	30
10	500	1	500	7,000	19	40
3	100	4	400	7,400	20	50
9	200	2	400	7,800	21	60
6	10	25	250	8,050	21	70
7	100	2	200	8,250	22	80

The same way we used to add items to group A can be used to add items to group B. We add items to group B until we reach 15% cumulative percent usage. For the inventory table above, group B includes items 8, 1, and 4.

The items that have not been included in group A nor B are grouped under group C.

The plot of the cumulative percent usage vs cumulative percent of items is illustrated below. It is clear from the graph that the majority of the money tied up is under group A.

ABC inventory control

Control Based on the ABC Classification

In general, it is recommended to stock up plenty of low-value items. Group A items should be observed closely and tight control on them should be applied. Group B items are less critical, therefore, they require control that is less than items A. It is sufficient to lightly monitor items in group C.