It is an inventory categorization technique in which the inventory is divided into three categories i.e.
- A Items – This consist of very important products and requires frequent analysis
- B Items – This consist of important products
- C Items – This consist of less important products
Description of the method: The purpose of ABC analyzer is simple, convenient and intuitive ranking of all resources in terms of their contribution to the profits or sales. With this ranking can prioritize activities to focus the limited resources of the company (labor, time, investment, etc.), to identify the excessive use of resources and to take timely corrective action.
Frequency of ABC analysis: This depends on the item category like for A items frequent analysis is helpful whereas for B items quarterly analysis can be helpful and at least 1 time a year for C items
In order to make the right decisions using this method it is recommended to look at trends over several periods. Monthly analysis can be carried out, but this time period is too small for the implementation of decisions and too small to track the dynamics of the situation
Advantages of ABC analysis: Universality, simplicity and clarity.
Limitations of ABC analysis: mathematical method too, sometimes cannot ignore the strategic goals of the company.
For example: the developing category will always be in the “C” category, because in the short term will have a minimal contribution to the sales / profit
Objective of ABC analysis:
In the material economy, the ABC analysis is considered to be a simple, yet very important tool to get an idea of the actual situation. Your goal is to find out what area, product or process, special attention should be paid. In this way, they can identify the relationship between income and expenses, to thereby draw for the future correct conclusions. With the ABC analysis, it is possible:
- To separate essential from inessential
- Provide transparency and benchmark
- To identify starting points for improvements
- To set rationalization priorities
- To chocking material economic decisions
- Avoid wasteful efforts
- Increase profitability