ABC analysis - wikipedia ABC analysis In materials management, the ABC analysis ( or Selective Inventory Control ) is an inventory categorization technique. ABC analysis divides an inventory into three categories - `` A items '' with very tight control and accurate records, `` B items '' with less tightly controlled and good records, and `` C items '' with the simplest controls possible and minimal records. The ABC analysis provides a mechanism for identifying items that will have a significant impact on overall inventory cost, while also providing a mechanism for identifying different categories of stock that will require different management and controls. The ABC analysis suggests that inventories of an organization are not of equal value. Thus, the inventory is grouped into three categories ( A, B, and C ) in order of their estimated importance. ' A ' items are very important for an organization. Because of the high value of these ' A ' items, frequent value analysis is required. In addition to that, an organization needs to choose an appropriate order pattern ( e.g. ' Just - in - time ' ) to avoid excess capacity. ' B ' items are important, but of course less important than ' A ' items and more important than ' C ' items. Therefore, ' B ' items are intergroup items. ' C ' items are marginally important. Contents 1 ABC analysis categories 2 ABC analysis in ERP packages 3 Mathematical calculation of ( ABC ) analysis 4 Example of the application of weighed operation based on ABC class 5 See also 6 References 7 External links ABC analysis categories There are no fixed threshold for each class, different proportion can be applied based on objective and criteria. ABC Analysis is similar to the Pareto principle in that the ' A ' items will typically account for a large proportion of the overall value but a small percentage of the number of items. Examples of ABC class are ' A ' items -- 20 % of the items accounts for 70 % of the annual consumption value of the items. ' B ' items - 30 % of the items accounts for 25 % of the annual consumption value of the items. ' C ' items - 50 % of the items accounts for 5 % of the annual consumption value of the items. Another recommended breakdown of ABC classes : `` A '' approximately 10 % of items or 66.6 % of value `` B '' approximately 20 % of items or 23.3 % of value `` C '' approximately 70 % of items or 10.1 % of value ABC analysis in ERP packages Major ERP packages have built in function of ABC analysis User can execute ABC analysis based on user defined criteria and system apply ABC code to items ( parts ). Mathematical calculation of ( ABC ) analysis Calculated ABC analysis delivers a precise mathematical calculation of the limits for the ABC classes. It uses an optimization of cost ( i.e. number of items ) vs. yield ( i.e. sum of their estimated importance ). Computed ABC was, for example, applied to feature selection for biomedical data, business process management and bankruptcy prediction. Example of the application of weighed operation based on ABC class Actual distribution of ABC class in the electronics manufacturing company with 4051 active parts. Distribution of ABC class ABC class Number of items Total amount required 10 % 70 % 20 % 20 % 70 % 10 % Total 100 % 100 % Using this distribution of ABC class and change total number of the parts to 14213. Uniform purchase When one applies equal purchasing policy to all 14213 components, example weekly delivery and re-order point ( safety stock ) of two - week supply assuming that there are no lot size constraints, the factory will have 16000 delivery in four weeks and average inventory will be 2.5 - week supply. Application of weighed purchasing condition Uniform condition Weighed condition Items Conditions Items Conditions All items 14213 Re-order point = 2 week supply Delivery frequency = weekly A-class items 200 Re-order point = 1 week supply Delivery frequency = weekly B - class items 400 Re-order point = 2 week supply Delivery frequency = bi-weekly C - class items 3400 Re-order point = 3 week supply Delivery frequency = every 4 weeks Weighed purchase In comparison, when weighed purchasing policy applied based on ABC class, example C class monthly ( every four weeks ) delivery with re-order point of three - week supply, B class bi-weekly delivery with re-order point of 2 weeks supply, A class weekly delivery with re-order point of 1 week supply, total number of delivery in 4 weeks will be ( A 200x4 = 800 ) + ( B 400x2 = 800 ) + ( C 3400x1 = 3400 ) = 5000 and average inventory will be ( A 75 % × 1.5 weeks ) + ( B 15 % x3 weeks ) + ( C 10 % × 3.5 weeks ) = 1.925 week supply. Comparison of `` equal '' and `` weighed '' purchase ( 4 weeks span ) ABC class No of items % of total value Equal purchase Weighed purchase note No of delivery in 4 weeks average supply level No of delivery in 4 weeks average supply level 200 75 % 800 2.5 weeks 800 1.5 weeks same delivery frequency, safety stock reduced from 2.5 to 1.5 weeks, require tighter control with more man ・ hours. 400 15 % 1600 2.5 weeks 800 3 weeks increased safety stock level by 20 %, delivery frequency reduced to half. Fewer man - hours required. 3400 10 % 13600 2.5 weeks 3400 3.5 weeks increased safety stock from 2.5 to 3.5 - week supply, delivery frequency is one quarter. Drastically reduced man ・ hour requirement. Total 4000 100 % 16000 2.5 weeks 5000 1.925 weeks average inventory value reduced by 23 %, delivery frequency reduced by 69 %. Overall reduction of man ・ hour requirement A class item can be applied much tighter control like JIT daily delivery. If daily delivery with one day stock is applied, delivery frequency will be 4000 and average inventory level of A class item will be 1.5 days supply and total inventory level will be 1.025 week supply. reduction of inventory by 59 %. Total delivery frequency also reduced to half from 16000 to 8200. Result By applying weighed control based on ABC classification, required man - hours and inventory level are drastically reduced. Alternate way of finding ABC analysis : - The ABC concept is based on Pareto 's law. If too much inventory is kept, the ABC analysis can be performed on a sample. After obtaining the random sample the following steps are carried out for the ABC analysis. Step 1 : Compute the annual usage value for every item in the sample by multiplying the annual requirements by the cost per unit. Step 2 : Arrange the items in descending order of the usage value calculated above. Step 3 : Make a cumulative total of the number of items and the usage value. Step 4 : Convert the cumulative total of the number of items and usage values into a percentage of their grand totals. Step 5 : Draw a graph connecting cumulative % items and cumulative % usage value. The graph is divided approximately into three segments, where the curve sharply changes its shape. This indicates the three segments A, B and C. See also Stock management References Jump up ^ Manufacturing planning and control systems for supply chain management By Thomas E. Vollmann Jump up ^ Lun, Lai, Cheng ( 2010 ) Shipping and Logistics Management, p. 158 Jump up ^ Purchasing and Supply Chain Management By Kenneth Lysons, Brian Farrington Jump up ^ Best Practice in Inventory Management, by Tony Wild ( 2nd Ed., p. 40 ) Jump up ^ Ultsch, Alfred, Jörn Lötsch. `` Computed ABC analysis for rational selection of most informative variables in multivariate data. '' PloS one 10.6 ( 2015 ) : e0129767. Jump up ^ Kringel, D., Ultsch, A., Zimmermann, M., Jansen, J.P., Ilias, W., Freynhagen, R.,... & Resch, E. ( 2016 ). Emergent biomarker derived from next - generation sequencing to identify pain patients requiring uncommonly high opioid doses. The pharmacogenomics journal. Jump up ^ Iovanella, A. : Vital few e trivial many, Il Punto, pp 10 - 13, July, 2017. Jump up ^ Barbara Pawelek, Jozef Pociecha, Mateusz Baryla, ABC Anal - ysis in Corporate Bankruptcy Prediction, Abstracts of the IFCS Conference, p 17, Tokyo, Japan, 2017 Jump up ^ Pareto 's law in this example is that a few high usage value items constitute a major part of the capital invested in inventories whereas a large number of items having low usage value constitute an insignificant part of the capital. External links SAP library ABC Analysis Oracle Overview of ABC Analysis ABC Analysis Solved Exercise Retrieved from `` https://en.wikipedia.org/w/index.php?title=ABC_analysis&oldid=825119000 '' Categories : Business terms Supply chain management Business intelligence Talk Contents About Wikipedia Беларуская ( тарашкевіца ) ‎ Čeština Deutsch Español Euskara Français हिन्दी Italiano Nederlands 日本 語 Polski Português Русский Suomi தமிழ் Українська 中文 Edit links This page was last edited on 11 February 2018, at 16 : 27. About Wikipedia

Question: abc analysis is based on the principle that
Answer: the 'A' items will typically account for a large proportion of the overall value but a small percentage of the number of items