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SELECTIVE INVENTORY CONTROL TECHNIQUESABC (Always Better Control ) analysisThis technique involves the classification of inventory items into three cvolume ategories A, B and C according to their annual cost consumption (unit cost x annual consumption).Although the break points between these groups vary according to individual business conditions, a common breakdown might be as follows:The ABC analysis is based on Paretos law (80-20 rule) that a few high usage value items constitute a major part of the capital invested and having low usage value constitute insignificant part of the capital. Category Percentage of the item Percentage of the total annual valu(or group) Value of the inventories (Rs)

A 10-20 70-85 B 20-30 10-25 C 60-70 5-15The ABC analysis facilitates analysis of yearly consumption value of items in the store to identify the vital few items that are generally referred to as A category items which are also vital from the financial point of view and require careful watch, scrutiny and follow-up. In ABC analysis the items are classified in three main categories based on the respective usage value :Category A items More costly and valuable Have large investments but not much in number (e.g. 10% of items accounts for 75% of total capital invested in inventory) More careful and closer control is needed Ordered frequently but in small number Top inventory staff controls the items Have high carrying cost Frequency orders of smaller size results in enormous saving A periodic review policy is followed to minimize the shortagesCategory B items Having average consumption value( e.g. nearly 15% of the item in an inventory account for 15% of the total investment) Have less importance than A class items but are much costly to pay more attention on their use. Requires lesser degree of control than those in category ACategory C items Having low consumption value(e.g. nearly 75% of inventory items account only for 10% of the total invested capital ) Such items can be stocked at an operative place where people can help themselves with any requisition formality. Can be managed in a little casual manner For these items, a fixed-order quantity system might be used, The order quantities can be relatively large without incurring excessive costs A large reserve stock can also be maintained

Important Points of ABC AnalysisWhenever the items can be substituted for each other they should preferably be considered as one item.More emphasis should be given to the value of consumption and not to the cost per unit of item.While classifying as A, B and C all the items consumed on the organization should be considered together instead of considering them like spares, raw material, semi-finished and finished items and then classifying as A, B, C.The period of consumption necessarily be one year.

Limitations of ABC AnalysisIf ABC Analysis is not updated and reviewed periodically, the real purpose of control may be defeated. For example C category items like diesel oil in the firm will become most high value items during power crisis and therefore should require more attention.

The periodic consumption value (not the unit value) is the basis for ABC classification. APPLICATIONS:The application of ABC analysis extends overall of the aspects of material management like purchasing, inventory control, value analysis etc.STEP-BY-STEP PROCEDURE FOR ABC ANALYSIS STEP 1: Determine the number of units sold or used in the past one year of period.STEP 2: Determine the unit cost for each item.STEP 3: Compute the annual usage value in Rs. ($) of each item consumed as follows: Annual usage value = annual requirement x per unit costSTEP 4: Arrange the items in a descending order according to their respective usage value computed in step 3. STEP 5: Express the annual value of each item as percentage of the total value of all items. Also compute the cumulative percentage of annual consumption value spent.STEP 6: Obtain the percentage value for each of the items. Also cumulate these percentage values.STEP 7: Draw a graph between cumulative percentage of items (on x-axis) and cumulative annual percentage of usage value (on y-axis) and mark cut-off points where the graph changes slope. Example 1:A company produces a mix of high technology products use in hospitals. The annual sales data are as follows:

Product Type Number of units Unit Price (Rs)1 1000 2.502 250 0.553 150 6.504 300 1.005 100 1.506 700 1.437 500 7.008 15 4.989 1000 0.7510 600 1.6211 25 33.0012 4 15.5013 1000 5.0014 2850 2.5015 10 0.8316 355 0.9817 50 1.3718 393 1.85For inventory control reasons, the company wants to classify into three groups A, B and C, on the basis of annual sales value of each item. You are assigned the task of helping the company. Example 2:Usage-Cost Data for 20 Inventoried Items

ABC Analysis Calculations

ABC Analysis Example