ABC Analysis

ABC (Always Better Control) analysis is an important tool used in material control. As we all know that a variety of parts and materials are used in manufacturing each and every industrial product. And efficient material management calls for a selective control over all the items of inventory. Since every item of material is not equally important for controlling point of view, some expensive or critical items require more control as compared to relatively cheaper and less important items. Hence there arises a need for an analysis of these items for the purpose of having selective control over them. So,with an increase in the quantity and variety of material items coming into the stores, we need to segregate these items into different categories. This approach of inventory control through analysis of their monetary value is known as ABC analysis. ABC or Always Better Control analysis originated in the General Electric Company of America.  Under this technique, we measures the cost share of each item of material in relation to total cost and material value. This requires a thorough analysis of money value of the different parts and materials. Under this analysis each item of inventory is studied in terms of its usage, lead time, technical problems and its relative share in the total monetary investment in the inventories. Critical or high value items need close attention and time whereas low value items need less time and attention.
Steps involved in ABC analysis are given below:
1. Find out the expected use of each item of stock in terms of physical units.
2. Determine the price per unit of each item.
3. Find the total cost share of each item of project by multiplying expected usage of each item by price per unit.
4. Arrange different items in order starting with the item with the share in total cost.
5. Express units of each item as a percentage of total units of all items.
6. Express cost of each item as a percentage of total cost of all items.
If possible, divide different items of stocks into three categories and label them as A, B and C. Items labeled as A comprise highest cost, B moderate cost and C the lowest cost.

Thus with the help of ABC analysis it becomes easier for the material management to exercise selective control by concentrating its attention on more important items.

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