Explain ABC Analysis

ABC Analysis: Criterion Employed – usage value.

Statistically speaking, in any industry in general, there are a few items only that form the major or expenditure on materials. Hence, in ABC analysis, depending upon the annual usage of the materials, items are broadly classified as A, B or C. Such a categorization helps the company to give only the necessary importance that is required for an item.

A)    Items: On a general basis, it is found that 5 to 10% of the total items with an organization account for about 70 to 75% of the total amount of money spent on materials. Quite naturally, a strict control has to be kept on their usage. Because of their high cost, these items have to be preferably stocked in smaller quantities. This will automatically mean that they have to be procured or re-ordered more frequently in smaller batch quantities.

B)     Items: Broadly, they form 10 to 15 % of the total items and represent about 10 to 15 % of the total expenditure on the materials. These items are intermediate in nature regarding their importance. Hence, the controls applied on these items need not be as rigid and detailed as in the case of A-items.

C)    Items: These items are numerous. They may form as much as 70 to 80 % no of the total number of items. Again, relatively speaking they are inexpensive contributing about say 5 to 10 % of the total annual expenditure on materials. They are, therefore, insignificant in the sense that they do not require any rigid control over them as compared to the A and B items. In terms of their procurement, the policy adopted is generally reverse of that applied for the A items. That is, C items are procured in sufficiently large quantities and not very frequently.

ABC analysis can be applied to every aspect of materials management it can be applied in the case of( a) purchasing, (b) receiving, (c) inspeotion, (d) store-keeping (e) issuing of stores, (f), verification of bills, (g) inventory control, (h) value analysis.

The purpose of A-B-C analysis can be enumerated as follows :

To separate out the items, normally in terms of their annual consumption.

1. To avoid wasteful expenditure.
2. To have a selective control on the various items of usage.
3. To have a more rationale purchasing policy. That is, priority is given to A- items regarding their purchase etc.
4. To have a better analysis of cost and item before any purchase is made.
5. There is better follow-up regarding the purchase and the usage of the items.
6. An effective value analysis about the items used by the company is created.