What is ABC inventory planning?

Answer 1

The ABC system is a simple procedure that can be used to isolate the items that require special attention in term of inventory control. The procedure calls for plotting percent of total inventory items against the percent of total euro value of these items for a given time period (usually one year). Figure 1.2.1 illustrates a typical ABC curve.

The idea of the procedure is to determine the percent of items that contribute 80% of the cumulative euro value. These items are classified as group A, and they normally constitute about 20% of all the items. Class B items are those corresponding to percent euro values between 80% and 95%. They normally comprise about 25% of all the items. The remaining items constitute class C.

Class A items represent small quantities of expensive items and must be subject to tight inventory control. Class B items are next in order where a moderate from of inventory control can be applied. Finally class C items should be given the lowest priority in the application of any form of inventory control. Usually, the order size of expensive class an items is expected to be low to reduce the associated capital cost. On the other hand, the other size for class C can be quite large.

The ABC analysis is usually the first step that must be applied in an inventory control situation. Once the important inventory items are identified, models of the types to be presented in the succeeding sections can be used to decide on the ideal way of controlling inventory.