Inventory Management 101 – ABC Inventory Analysis

28 June 2020

Inventory Management 101 – ABC Inventory Analysis

ABC analysis is an approach for classifying inventory items based on the items' consumption values.

Consumption value is the total value of an item consumed over a specified time period. The period could be weeks, months or years.

The Steps to conduct an ABC Analysis are as follows:

1.    Determine periodical usage or sales for each item.

2.    Determine the percentage of the total usage or sales by item.

3.    Rank the items from highest to lowest percentage.

We will illustrate the determine of ABC via periodical usage.

1.    A classification items are very important and sometimes business critical. These typically sold in large volumes.

2.    B classification items are important, but less important than ‘A’ items and more important than ‘C’ items. These are typically mid-range volume

3.    C classification items are lower demand than ‘B’ items

Table 1

Table 1 illustrated the formula

1.    Total Monthly Run Rate for all the items (=SUM(D2:D10)

2.    ABC% (Total Usage) , is the item usage divide by Total Monthly Run Rate (=D2/$D$11

3.    ABC Classification, to classify the ABC base on ABC%(Total Usage). If Item ABC%(Total Usage) > 20%, will be A item, ). If Item ABC%(Total Usage) > 10%, will be B item, ). If Item ABC%(Total Usage) < 5%, will be C item.

=IFS(E2>20%, "A", E2>10%,"B",E2<5%,"C")

About the Author

Grace is a freelancer for Supply Chain Management specialized in helping companies reducing operation costs and increase profits through optimized Supply Chain, Sourcing and Procurement Operation.

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