ABC Analysis for

Inventory
Michael Iosua
MBA 530, Dr. Foster
Class of 2009
 Items to be covered
1. What is ABC Analysis for Inventory?
2. Brainstorming Activity
3. Nuts and Bolts
4. How ABC Analysis works
5. A “Real World” Example
6. ABC Analysis Exercise
7. Summary
8. Further Readings
9. Appendix
 What is ABC Analysis for
Inventory?
• An inventory control system
• Categorizes by dollar volume contribution
• Valuable for small businesses
 Brainstorming Exercise
• Which items contribute most to your
dollar volume?
• What is your inventory control method?
• How much inventory is wasted due to
lack of inventory control?
 Nuts and Bolts
1. Strict control of high dollar volume items
2. Higher inventory control level
3. Leads to inventory turnover and service
level increases
4. Resources are better allocated to control
efforts.
 Drawbacks of ABC Analysis for
Inventory
• Less control over B and C, etc. items
• Not an “all-purpose” inventory control
method
• Profit not necessarily maximized
How does ABC analysis work?
Steps in ABC Analysis:
2. Determine the dollar volume
3. Rank items.
4. Calculate the percentage dollar volume
for each item.
 How does ABC analysis work?
(continued)
1. Determine the cumulative percentages
for number of items and dollar volume
2. Classify items as A, B, C, etc.
A “Real World” Example

Sam-Mart Produce
Department
 Sam-Mart Produce Dept.
• Continually dumps produce due to
spoilage
• Has difficulty keeping its stock current
• Must reduce spoilage costs
 Sam-Mart Produce Dept.
Sam-Mart Produce Dept.
Product Pounds Sold Cost/lb $ Value
Mangoes 60 $ 4.00
Lettuce 1000 $ 1.00
Bananas 500 $ .75
Tomatoes 1000 $ 2.00
Totals 100
 Step One: Determine dollar value
Product Pounds Sold Cost/lb $ Value

Mangoes 650 $ 4.50 $ 2925.00

Lettuce 1950 $ .50 $ 975.00

Bananas 2500 $ .60 $ 1500.00

Tomatoes 900 $ .90 $ 810.00

Totals 6000 $ 6210.00

 Step Two: Rank Items

Cum %
Cum %
Rank Product $ Value % of $ of $ Class
of units
value
1 Mangoes $ 2925
2 Bananas $ 1500
3 Lettuce $ 975
4 Tomatoes $ 810
Totals $ 6210
 Step Three: Calculate percentage
of total dollar volume for each item
Cum %
Cum %
Rank Product $ Value % of $ of $ Class
of units
value
1 Mangoes $ 2925 47.1%
2 Bananas $ 1500 24.2%
3 Lettuce $ 975 15.7%
4 Tomatoes $ 810 13.0%
Totals $ 6210 100.0%
 Step Four: Determine cumulative
percentages
Cum %
Cum %
Rank Product $ Value % of $ of $ Class
of units
value
1 Mangoes $ 2925 47.1% 47.1% 10.8%
2 Bananas $ 1500 24.2% 71.3% 52.5%
3 Lettuce $ 975 15.7% 87.0% 85.0%
4 Tomatoes $ 810 13.0% 100.0% 100.0%
Totals $ 6210 100.0%
 Step Five: Classify items

Cum %
Cum %
Rank Product $ Value % of $ of $ Class
of units
value
1 Mangoes $ 2925 47.1% 47.1% 10.8% A
2 Bananas $ 1500 24.2% 71.3% 52.5% B
3 Lettuce $ 975 15.7% 87.0% 85.0% C
4 Tomatoes $ 810 13.0% 100.0% 100.0% C
Totals $ 6210 100.0%
 ABC Analysis Exercise
• Earnhardt Auto-Mart
• Sells water pump, timing belt, oil filter,
quart of oil
• Needs to improve inventory control
 Earnhardt Auto-Mart
Product Items sold Cost per item $ Value

Water Pump 10 $ 150

Timing belt 10 $ 50

Oil filter 50 $ 15

Oil quart 100 $ 3

Totals 170
 Summary
• Priority on high dollar volume
items
• Tighter control of priority items
• Not an “all purpose” method
• Holds to Pareto rule
 Further Readings
• Bhattacharya, Arijit; Sarkar, Bijan; Mukherjee, Sanat.
(2007). Distance-based consensus method for ABC
analysis. International Journal of Production Research,
45(15), pp. 3405-21. Retrieved from Business Source
Premier.
• Partovi, Fariborz; Hopton, Walter. THE ANALYTIC
HIERARCHY PROCESS APPLIED TO TWO TYPES OF
INVENTORY PROBLEMS. Production & Inventory
Management Journal, 35(1), pp. 13-20. Retrieved from
Business Source Premier.
 Further Readings (continued)
• Flores, Benito; Whybark, D. Clay. IMPLEMENTING
MULTIPLE CRITERIA ABC ANALYSIS. Engineering
Costs & Production Engineering, 15(1-4), pp. 191-6.
Retrieved from Business Source Premier.
Appendix
 References
• Fuerst, William J. SMALL BUSINESSES GET A NEW
LOOK AT ABC ANALYSIS FOR INVENTORY
CONTROL. Journal of Small Business Management,
45(15), pp. 39-44. Retrieved from Business Source
Premier.
• Caldwell, Bruce D. The Benefits of ABC Analysis for
Inventory Reduction. The Connecticut Association of
Purchasing Management, Inc. Retrieved November 20,
2007, from http://www.capminc.org/abcanalysis.htm
 Earnhardt Auto-Mart
Product Items sold Cost per item $ Value

Water Pump 10 $ 150

Timing belt 10 $ 50

Oil filter 50 $ 15

Oil quart 100 $ 3

Totals 170
 Step One: Determine dollar value
Product Items sold Cost per item $ Value

Water Pump 10 $ 150 $ 1500

Timing belt 10 $ 50 $ 500

Oil filter 50 $ 15 $ 750

Oil quart 100 $ 3 $ 300

Totals 170 $ 3050

 Step Two: Rank Items
Cum %
Cum %
Rank Product $ Value % of $ of $ Class
of units
value
1 Water $ 1500
pump
2 Oil filter $ 750
3 Timing $ 500
belt
4 Oil quart $ 300
Totals $ 3050
 Step Three: Calculate percentage
of total dollar volume for each item
Cum %
Cum %
Rank Product $ Value % of $ of $ Class
of units
value
1 Water $ 1500 49.2%
pump
2 Oil filter $ 750 24.6%
3 Timing $ 500 16.4%
belt
4 Oil quart $ 300 9.8%
Totals $ 3050 100.0%
 Step Four: Determine cumulative
percentages
Cum %
Cum %
Rank Product $ Value % of $ of $ Class
of units
value
1 Water
$ 1500 49.2% 49.2% 5.9%
pump
2 Oil filter $ 750 24.6% 73.8% 35.3%
3 Timing
$ 500 16.4% 90.2% 41.2%
belt
4 Oil quart $ 300 9.8% 100.0% 100.0%
Totals $ 3050 100.0%
 Step Five: Classify items
Cum %
Cum %
Rank Product $ Value % of $ of $ Class
of units
value
1 Water
$ 1500 49.2% 49.2% 5.9% A
pump
2 Oil filter $ 750 24.6% 73.8% 35.3% B
3 Timing
$ 500 16.4% 90.2% 41.2% C
belt
4 Oil quart $ 300 9.8% 100.0% 100.0% D
Totals $ 3050 100.0%