ABC ANALYSIS

(ABC = Always Better Control)

• This is based on cost criteria.
• It helps to exercise selective control when confronted
with large number of items it rationalizes the number
of orders, number of items & reduce the inventory.
• About 10 % of materials consume 70 % of resources
• About 20 % of materials consume 20 % of resources
• About 70 % of materials consume 10 % of resources
 ‘A’ ITEMS

– Small in number, but consume large amount of

resources
– Must have:
• Tight control
• Rigid estimate of requirements
• Strict & closer watch
• Low safety stocks
• Managed by top management
 ‘B’ ITEMS

• Intermediate
• Must have:
• Moderate control
• Purchase based on rigid requirements
• Reasonably strict watch & control
• Moderate safety stocks
• Managed by middle level management
 ‘C’ ITEMS

• Larger in number, but consume lesser

amount of resources
• Must have:
• Ordinary control measures
• Purchase based on usage estimates
• High safety stocks 
• ABC analysis does not stress on items those are less
costly but may be vital
 ANNUAL COST CUMMULATIVE
ITEM % ITEM COST %
ABC [Rs.] COST [Rs.]
1 90000 90000
10 % 70 %
A 2 50000 140000
3 20000 160000
N 4 7500 167500
20 % 20 %
A 5 7500 175000
6 5000 180000
L
7 4500 184500
Y 8 4000 188500
9 2750 191250
S
10 1750 193000
I 11 1500 194500

S 12 1500 196000
13 500 196500 10 %
70 %
14 500 197000
15 500 197500
WORK 16 500 198000
S HEET 17 500 198500
18 500 199000
19 500 199500
20 500 200000
 When and why to use it?
• The ABC analysis can be also be useful in several steps of the
Sourcing Value Chain:
! Demand Identification, to gather the annual spend of a site
! Demand Aggregation, to gather the annual spend of several
sites
! Opportunity Assessment, to identify leveraging opportunities

• The ABC tool is used to identify the “vital few” from the
“trivial many”, according to a defined set of criteria

• Different decisions may be taken from the result of the ABC

analysis
 6-steps used to perform an ABC
analysis:
• 1st step – Identify the objective and the analysis
criterion
• 2nd step –Collect data about the analyzed
population
• 3rd step – Sort out the list by decreasing impact
• 4th step – Calculate the accumulated impact and
the percentage
• 5th step – Identify the classes
• 6th step – Analyze the classes and take
appropriate decisions
• Required Resources
An ABC analysis requires directionally correct
data. It relies on the availability of systems
allowing measurement of the criteria chosen
for the analysis.

• Tool Limitations / Common Pitfalls

Most of the time only past annual spend is
available to perform an ABC analysis.
 CONCLUSION
Thus, ABC Analysis is a vital method of
Inventory Control.