Inventory

How To Use ABC Inventory Classification

Executive Summary

  • ABC classification or ABC inventory is a way of segmenting inventory so that the product location combinations can be managed.
  • We cover how ABC classification works and how it compares to other comparative methods of segmentation.

Introduction to ABC Classification

ABC classification is probably the most common way of performing the segmentation of an inventory database. In this article, we will find all about ABC classification.

ABC Classification, ABC Inventory or ABC Inventory Classification

One way of looking at inventory is by ABC classification, ABC inventory or ABC inventory classification. ABC classification is where inventory is segmented by valuation or volume or both. ABC inventory classification sets up three divisions or segments.

  • A Items: These are the products or the product location combinations that are the most expensive, and or that have the highest sales.
  • B Items: These are the products or the product location combinations that are the medium expensive, and or that have a medium level of sales.
  • C Items: These are the products or the product location combinations that are the least expensive, and or that have the lowest sales.

ABC Analysis, ABC Analysis of Inventory

To use ABC classification, an ABC analysis or ABC analysis of inventory is necessary.

Some ERP systems like SAP ECC have transactions where this can be automatically calculated, and this is one reason that explains why ABC classification, ABC inventory or ABC inventory classification are so frequently used.

ABC analysis or ABC analysis of inventory is not as straightforward as it sounds. If only sales quantities are used, then the most important items, which are often the highest sales priced items are not captured. If only sales dollar amounts are used, then the volume is left out. If the volume X sales price is used, then the highest value items will dominate the ABC inventory results.

ABC Inventory Control

There is no ABC inventory control “setting” in supply planning systems. Rather ABC inventory control is simply controlling inventory by the ABC analysis of inventory. For instance, one could set C items to be consumption planned while A and B items would be driven by the forecast.

There are many examples, but it would simply mean changing the settings in the supply planning system to correspond to ABC.

Conclusion

Therefore ABC analysis of inventory is much easier to talk about in the abstract than it is to implement. In US companies for every one worker who performs the calculation, there may be 5 or 6 people throwing the term around and offering their opinion on it. Books that cover ABC inventory analysis will almost always underestimate the difficulty in using ABC inventory classification.

References

I cover inventory and safety stock in the following book.