Lecturenotes 34

LECTURE NOTES ON A. B. C.
ANALYSIS
Ramun Prasad†*
(Lecture No. -34)
a
Recapitulate
Learning Outcomes
ay
After this session students will be able to:
- Explain the A.B.C. Analysis
- Discuss the importance of A.B.C. Analysis

.G
- Define A.B.C.Analysis
1 A.B.C. Analysis (Always Better Control)

(ABC Analysis/ Pareto Analysis/80:20 Rule/Law of Vital Few)
.P
1.1 Introduction to A.B.C.

ABC is a selective inventory control technique which stand for Always Better Control.
ABC analysis is a technique for prioritizing the management of inventory. Inventories are
categorized into three classes - A, B, and C. Most management efforts and oversights are
expended on managing A items. C items get the least attention and B items are in-between
(moderate).
G
All three refer to categorization of various items, products and services into three groups
depending upon their importance and significance so that their handling is done accordingly.
1.2 Explanation of A.B.C.

This ABC analysis is based on economic principle of economist Vilfredo Pareto which
state that most of the economic productivity comes from only a small parts of the economy
i.e. in any large group there are “significant few” and “insignificant many”.
As I have discussed above, ABC analysis technique involves the classification of inventory
* Lecturer,Department of Humanity (Economics), Government Polytechnic, Gaya, Bihar
†
E-mail: ramuncup@gmail.com, Homepage: https://ecoramun.wordpress.com/
1
Unit-06: Materials Management Ramun Prasad
items into three categories A, B & C. This ABC analysis can be explained with the help of
following Table-1 & Table-2
a
ay
Figure 1: Table-01
The annual consumption value is calculated by the formula: (Annual demand) × (item cost
per unit)
.G
.P
G
Figure 2: Table-02
Both of the above tables demonstrate that a few high usage value items constitute a major
part of the capital invested in inventories, where as bulk of items in inventory having low
usage value constitute insignificant part of capital.
2
1.3 Classification of items Under A.B.C.

1.3.1 Category ‘A’
Most valuable and costly items are classified under ‘A’ category. Such items have large
investment but not much in number. For example 10 percent of items account for 70 percent
of total invested in inventory. So, more careful and strict control is needed for such items.
This category will be the smallest category in quantity but largest in monetary terms.
1.3.2 Category ‘B’

Category ‘B’ represents the middle parts of products between Category ‘A’ and Category
a
‘C’. They are larger in number than category ‘A’ but smaller in monetary term. These items
having average consumption value. 20 percent of the item in an inventory account 20 percent
for total investment. These ‘B’ items have less importance than ‘A’, so moderate control is
ay
needed for them.
1.3.3 Category ‘C’

The items placed under category ‘C’ have the lowest consumption value.But, nearly 70 per-
cent of inventory items account only for 10 percent of the total invested capital. So, these
are “trivial many” items which do not catch much strict management attention i.e. loose
.G
control is needed for such items.
Now, this ABC analysis can be demonstrated with help of following graphs:
.P
G
3
1.4 Why A.B.C. Analysis:

• Ensures control over the costly items.
• Reduction in the storage expenses.
• Resource allocation.
• Increased economy.
1.5 Limitation of A.B.C. Analysis:

• ABC Analysis does not permit precise consideration of all relevant problem of inven-
a
tory control.
• If ABC Analysis is not updated and reviewed periodically the real purpose of control
ay
may be defeated.
• Periodical consumption value is the basis for ABC classification not the unit value.
1.6 Conclusion
.G
During this session, we have discussed about ABC analysis and learned that ABC analysis
is a great way to inform your data into well interpreted segments that you can use to reduce
overhead costs and drive profit.
1.7 Questions for Self-Assessment

1. Describe the A.B.C.
.P
2. Define A.B.C
3. Explain A.B.C. Analysis with the help of graph.
1.8 Glossary
ABC: ABC is a selective inventory control technique which stand for Always Better Con-
G
trol.
References
[1] (https://youtu.be/Q2QYwPAJjKM)
[2] (https://youtu.be/9qnLpjpnsuQ)
[3] (https://files.eric.ed.gov/fulltext/EJ1053624.pdf
[4] (https://images.app.goo.gl/W6gxAx9ZQ4jUCvfy8)
[5] (https://images.app.goo.gl/5pPxt3RwiTs2hdVQ9)

Lecturenotes 34

Uploaded by

Copyright:

Available Formats

Lecturenotes 34

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Lecturenotes 34

Uploaded by

Copyright:

Available Formats

LECTURE NOTES ON A. B. C.

- Discuss the importance of A.B.C. Analysis

1 A.B.C. Analysis (Always Better Control)

1.1 Introduction to A.B.C.

1.2 Explanation of A.B.C.

1.3 Classification of items Under A.B.C.

1.3.2 Category ‘B’

1.3.3 Category ‘C’

1.4 Why A.B.C. Analysis:

• Reduction in the storage expenses.

1.5 Limitation of A.B.C. Analysis:

1.7 Questions for Self-Assessment

3. Explain A.B.C. Analysis with the help of graph.

You might also like