SEMINAR

ON
ABC
ANALYSIS
PRESENTED BY:
DENDEN DIANA
M. Sc (N) 2nd Year
R.I.N.P.S
 INTRODUCTION
• ABC analysis is a type of inventory categorization
method that will have a substantial impact on overall
spending of an organization. ABC analysis is derived
from the term “The Pareto Principle” named after an
Italian economist Vilfredo Pareto, also called as 80/20
rule. 
• The categories are sorted based on its projected value
such as A, B, and C, in descending value. A has the
highest value items, B is lower value than A, and C has
the lowest value. It is also known as Selective Inventory
Control (SIC).
 DEFINITION
• ABC analysis is defined as the process of classifying items by
using values as measure.
• ABC analysis: ABC analysis is defined as the process of
classifying items by using values as measure.
A items - represents high cost centre
B items – intermediate cost centre
C items – low cost centre
 USES
The ABC analysis is widely used in -
 Supplying chain management

 Stock checking and

 Inventory system
 OBJECTIVES
• To provide continuous flow of required materials, parts and
components for efficient and uninterrupted flow of production.
• To minimize investment in inventories keeping in view
operating requirements.
• To provide for efficient store of materials so that inventories are
protected from loss by fire and theft and handling time and cost
are kept at a minimum.
• To keep surplus and obsolete items to minimum.
 NEED FOR PRIORITIZING ABC
ANALYSIS
• Item A: In the ABC model of inventory control,
items categorized under A are goods that register
the highest value in terms of annual consumption.
It is interesting to note that the top 70% of the
yearly consumption value of the company comes
from only about 10% of the total inventory items.
Hence, it is crucial to prioritize these items.
 CONTD…
• Item B: These are items that have a medium consumption value.
These amount to about 20 percent of the total inventory in a
company which accounts for about 20% of annual consumption
value.
• Item C: The items placed in this category have the lowest
consumption value and account for 10% of the annual
consumption value that comes from about 70 percent of the total
inventory items.
 POLICIES GOVERNING THE ABC
METHOD
• Item A:
a) These are subjected to strict inventory control and are given highly
secured areas in terms of storage
b) These goods have a better forecast for sales
c) These are also the items that require frequent reorders on a daily or a
weekly basis
d) They are kept as a priority item and efforts are made to avoid
unavailability or stock-out of these items
 CONTD…
• Item B:

a) These items are not as important as items under

section A or as trivial as items categorized under C
b) The important thing to note is that since these
items lie in between A and C, they are monitored
for potential inclusion towards category A or in a
contrary situation towards category C
 CONTD…
• Item C:

a) These items are manufactured less often and follow the

policy of having only one of its item on hand or in some
cases they are reordered when a purchase is actually made.

b) Since these are low demand goods with a comparatively

higher risk of cost in terms of excessive inventory, it is an
ideal situation for these items to stock-out after each
purchase
 RULES OF ABC ANALYSIS

• ABC analysis may be seen to share similar ideas as the Pareto

Principle, which states that 80% of overall consumption value
comes from only 20% of items. Plainly, it means that 20% of
the products will bring in 80% of the revenues.
ABC analysis works by breaking it down in the following
ways:
• A items: 10% of all goods contribute to 70% of the annual
consumption value of the items.
• B items: 20% of all goods contribute to 20% of the annual
consumption value of the items.
• C items: 70% of all goods contribute to only 10% of the
annual consumption value of the items.
 CONTD…..

• Note: In order to calculate the annual

consumption value of any item or items:
• Annual consumption value = (Annual
demand) × (item cost per unit)
 CLASSIFICATION
It is classified into three categories:
CONTD…
1. Class A: Higher values, which accounts for major share of
annual inventory value.
A items:
 Rigorous value analysis
 Rigid estimates
 Strict and close watch
 Management of items should be done at top management
level
 Centralized purchasing and storage
 CONTD….

2. Class B: Medium value items, which do not belong to either

of the classes and not so strict control procedures, need be
followed in regard to the items in this group.

B items:
 Moderate controls
 Purchase based on rigid requirement
 Reasonably strict watch and control
 Management be done at middle level
CONTD….
3. Class C: Low value items, but is required in large quantities
and consists of various types and varieties like clips, washers.
C items:
 Ordinarily control measures
 Purchased based on usage estimates
 Controls exercises by stoke keeper

 Management to be done at lower levels

 Decentralized (delegated) purchasing

 ANOTHER RECOMMENDED BREAKDOWN
OF ABC CLASSES
ITEMS CLASS A CLASS B CLASS C

Number of items
10 20 70
as a % of total
number

Annual usage value

70 20 10
as % on usage
total
CONTD…
• ABC analysis tells us that 10% of all items (called A
category) accounts for 70% of annual consumption costs,
another 20% of items (B category) account for 20% of the
costs, while the balance 70% of items (C category) account
for about 10% of costs.
• Overall “A’s” are most important/highest spend, “B’s” are
important, but of course less important than “A’s” but more
important than “C’s”. “C’s” then are least important.
•  
 EXAMPLE OF ABC ANALYSIS
Category of Number of % of total % of ACV as ACV (Indian
items items (n), total items compared to Rupee)
sample size total ACV (%)

Category A 35 14 70 194,103,510

Category B 52 21 20 56,631,357

Category C 160 65 10 28,059,784

• ACV: Annual Consumption value, ABC: Always, Better and Control.

 PROCEDURE OF ABC
CLASSIFICATION
1) Step 1
• List down item wise annual consumption of inventory
with its unit price and determine the annual
consumption of each time.
2) Step 2
• Rewrite the above list in descending order of money
value with additional column to enter cumulative value.
CONTD…
Step 3
• From the list prepared, mark the serial number items against
which the cumulative value, annual consumption reaches a
figure of 70 approximately. These are called class A items,
compute the number of class A items as a percent of total items.
• Continue this process down the list and note serial number of
items against which the cumulative % value reads approx. 90%.
This additional value constitute class B.
• The remaining items in the list form class C item and determines
quantity in percent of total number of items.
CONTD…
4. Step 4
• Plot a curve with cumulative percentage of annual value on
quantity terms on X-axis and money value on Y-axis.
 ADVANTAGES
• Provides a mechanism for identifying items that will have a
significant impact on overall inventory cost.
• It helps in economizing ones effort to achieve greater results.
• It helps to segregating those items which ought to be given
priority to maximize results.
• This method helps businesses to maintain control over the
costly items which have large amounts of capital invested in
them.
• It makes sure that the stock turnover ratio is maintained at a
comparatively higher level through a systematic control of
inventories.
 LIMITATIONS
• When number of items runs into several thousands, it is not
convenient to compute and carry out this analysis.
• More chances of deterioration in storage exist since C items are
purchased in bulk and inventory on these piles up.
• Loose control on C may result in shortages.

• ABC focuses on money value and not on functional importance

of such items, resulting in shortages of critical items.
• ABC ignores market conditions, market availability, etc
 RESEARCH ARTICLE
• Title: ABC, VED and lead time analysis in the
surgical store of a public sector tertiary care
hospital in Delhi
• Author: Mansoor H et al
• Volume: 63
• Issue:3
• Date of Publishing: 2019 Sep 20
CONTD…
• Background

An efficient inventory control system would help optimize the

use of resources and eventually help improve patient care. 
• Objectives: The study aimed to find out the surgical
consumables using always, better, and control (ABC) and vital,
essential, and desirable (VED) technique as well as calculating
the lead time of specific category A and vital surgical
consumables. 
CONTD…
• Methods: This was a descriptive, record-based study conducted
from January to March 2016 in the surgical stores of the All India
Institute of Medical Sciences, New Delhi. The study comprised
all the surgical consumables which were procured during the
financial year 2014–2015.
• Results: ABC analysis revealed that 35 items (14%), 52 items
(21%), and 171 items (69%) were categorized into A (70%
annual consumption value [ACV]), B (20% ACV), and C (10%
ACV) category, respectively.
CONTD…

• Conclusions: Hospitals stores need to implement

inventory management techniques to reduce the
number of stock-outs and internal lead time.
 SUMMARY:
• ABC analysis is a type of inventory categorization method
in which inventory is divided into three categories A, B, and
C in descending value. A has the highest value items, B is
lower value and C has the lowest value. ABC analysis is
based on the Pareto Principle, which states that 80% of
overall consumption value comes from only 20% of items.
Plainly, it means that 20% of the products will bring in 80%
of the revenues.
 CONCLUSION
• The ABC model works in a manner as to get prime attention to
the important items or the critical few and not have unnecessary
attention be spent on the not so important items or the trivial
many. Each category has a differing management control in
place.
• This prioritization of attention and focus is vital to keep the
costs in check and under control in the supply chain system. To
get the best results it is important that items that involve a lot of
costs are given the due management attention.