ABC Analysis

It is a system of material Control. It exercises differential control classified on the basis of the investment done in the stock. It concentrates more on critical investments.
Material or stock is divided or classified according to their importance or value. This is a principle of selective control. The emphasis of ABC analysis technique is that the management should concentrate its energy in controlling those items that mostly affect the organisational objects. Manufacturing concerns find it useful to group the materials into three classes on the basis of investment involved.
Category A
Materials having higher values but constitute small percentage of total items, are grouped in ‘A’ category. In other words it consists of those items which require large investments (say about 70% of total value of stores) but constitute a small percentage ( about 10%) of total amount of stores/stock. High degree of control is exercised in such stock by keeping the material under lock and key and aspects like Maximum level, minimum levels  and reorder levels are strictly maintained and followed
Category B
It consists of those items which require relatively moderate investments (about 20% of value of sock or stores)but constitute relatively less percentage (say 20%) of total items of stock or stores.
 Moderate degree of control is exercised. Orders are placed on periodic review basis
Category C
It includes those items that require minimum investment (say 10%) but constitute a large amount of stock or material (about 70%).

After the items of materials are classified into A, Band C category, control can be exercised in a selective manner as follows:
(i) Greater care and strict control should be exercised on the items of category ‘A’ as any loss or breakage or wastage of any item of this category many prove to be very costly. Economic order quantity and reorder level should be carefully fixed for such category of items.
(ii) Moderate and relaxed control is required for the items of category ‘B’.
(iii) There is not much need for exercising control over the items of category ‘C’. Periodic or annual verification is required for this category of materials.

Advantages of ABC Analysis : The advantages of ABC analysis are given below:
· Close and strict control of costly items is ensured.
· Investment in inventory can be regulated and funds can be utilised in the best possible way.
· Economy is achieved in respect of stock carrying cost;
· It helps to keep enough safety stock for ‘C’ category items.
· Clerical cost can be reduced and inventory is maintained at optimum level.
· Scientific and selective control helps in maintenance of high stock turnover rate


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