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ABC Inventory Classification is an Inventory Classification System and is an important aspect of inventory management. ABC Inventory Classification involves classifying inventory according to some measure of importance and allocating control efforts accordingly.
ABC Classification uses the A-B-C approach to classify inventory items according to some measure of importance, usually annual dollar value (i.e. dollar value per unit multiplied by annual usage rate), and then allocates control efforts accordingly.
Put simply: the goal of ABC classification is to decide what inventory is valuable enough to have, for instance, a daily or weekly inventory count and what inventory is not worth the efforts. You can figure, using a company like Boeing as an example; a box of screws would not be worth the effort of counting while the actual propellers would be worth doing an inventory check on. So we need to classify this inventory and using ABC Classification is one way of doing this, there are numerous in the inventory classification system.
ABC Classification Example
The annual dollar value of 12 items has been calculated based on annual demand and unit cost. The annual dollar values were then ordered (arrayed) from highest to lowest to simplify the classification of these items. Please notice that the item numbers are not in what it would have been had their original order/sequence due to ordering (arraying) by annual dollar values.
Item Number
| Annual Demand
| (x) Unit Cost
| (=) Annual Dollar Value | Classification
| | 8 | 1,000 | $4,000 | $4,000,000 | A | | 5 | 3,900 | 700 | 2,730,000 | A | | 3 | 1,900 | 500 | 950,000 | B | | 6 | 1,000 | 915 | 915,000 | B | | 1 | 2,500 | 330 | 825,000 | B | | 4 | 1,500 | 100 | 150,000 | C | | 12 | 400 | 300 | 120,000 | C | | 11 | 500 | 200 | 100,000 | C | | 9 | 8,000 | 10 | 80,000 | C | | 2 | 1,000 | 70 | 70,000 | C | | 7 | 200 | 210 | 42,000 | C | | 10 | 9,000 | 2 | 18,000 | C | | | | | 10,000,000 | |
As you can see, we classified the largest items in one class and that is class A. We will propagate the most funding and efforts in managing class A inventory. We know that class B has less of an annual dollar value; hence, we will spend of our resources on class B items. Finally, we are left with class C items, it would be beneficial to spend the least amount of resources on managing these inventory items and focus on other parts of our inventory as well as our organization. ABC classification can save an organization much of their valuable resources and time which is why ABC classification is one of the most common used inventory management systems. |
