Inventory Classification – ABC Classification, Advantages & Disadvantages
18 February 2013 1 Comment
Inventory in any organization can run in thousands of part numbers or classifications and millions of part numbers in quantity. Therefore inventory is required to be classified with some logic to be able to manage the same.
In most of the organizations inventory is categorized according to ABC Classification Method, which is based on pareto principle. Here the inventory is classified based on the value of the units. The principle applied here is based on 80/20 principles. Accordingly the classification can be as under:
A Category Items Comprise 20% of SKU & Contribute to 80% of $ spend. B Category Items Comprise 30% of SKU & Contribute to 15% of $ spend. C Category Items Comprise 50% of SKU & Contribute to 5% of $ spend.
The above is only an illustration and the actual numbers as well as percentages can vary.
Example: Table of Inventory Listing by Dollar Usage Percentage.
|Item||Annual Usage in No. Units||Unit Cost-$||Usage in Dollars||Percentage of Total Dollar Usage|
Advantages of ABC Classification
- This kind of categorization of inventory helps one manage the entire volume and assign relative priority to the right category. For Example A Class items are the high value items. Hence one is able to monitor the inventory of this category closely to ensure the inventory level is maintained at optimum levels for any excess inventory can have huge adverse impact in terms of overall value.
- A Category Items: Helps one identify these stocks as high value items and ensure tight control in terms of process control, physical security as well as audit frequency.
- It helps the managers and inventory planners to maintain accurate records and draw management’s attention to the issue on hand to facilitate instant decision-making.
- B Category Items: These can be given second priority with lesser frequency of review and less tightly controls with adequate documentation, audit controls in place.
- C Category Items: Can be managed with basic and simple records. Inventory quantities can be larger with very few periodic reviews.
Example: Take the case of a Computer Manufacturing Plant; the various items of inventory can be broadly classified as under:
|SKU Description||Classification of Inventory||Remarks|
|Processor Chips||A Class||Kept under High Value Storage/Asset Tracking / Access Control required|
|Memory Chips||A Class||Kept under High Value Storage/Asset Tracking / Access Control required|
|Hard Disk / Storage Media||A Class||Kept under High Value Storage/Asset Tracking / Access Control required|
|Software License||A Class||Kept under High Value Storage/Asset Tracking / Access Control required|
|Disk Drives||A Class||Normal Storage / Access Control Required|
|Cabinet / Case||B Class||Normal Procedures|
|Battery Pack||B Class||Normal Procedures|
|Monitor||A Class||Normal Storage / Access Control Required|
|Keyboard||B Class||Normal Procedures|
|Training Manuals||C Class||Minimal Procedures|
|Mouse||B Class||Normal Procedures|
|Stickers||C Class||Minimal Procedures|
|Screws & Nuts||C Class||Minimal Procedures|
|Power Cord||C Class||Minimal Procedures|
|Starter Assembly Pack-Instructions||C Class||Minimal Procedures|
- Inventory Classification does not reflect the frequency of movement of SKU and hence can mislead controllers.
- B & C Categories can often get neglected and pile in huge stocks or susceptible to loss, pilferage, slackness in record control etc.