ABC Analysis

ABC Classification System

The method essence

Sanders mentioned that objects (items) in the supply chain are not of equal importance. Some are very important, and others are less important. For example, specialized surgical equipment is important for a hospital, while latex gloves are less important (Sanders, 2013).

ABC classification is a ranking system for identifying and grouping items in terms of how useful they are for achieving business goals.

The ABC system classifies logistics object according to its size, volume, or cash value added to aggregate category of the firm (inventory or overall costs, turnover, etc.). Classifying inventory based on degree of importance allows us to give priority to important objects and manage those with care. It also prevents us from wasting precious resources on managing objects that are of less importance.

In the context of inventory control, typically thousands of independent demand items are held in inventory by a company, especially in manufacturing. However a small percentage is of such a high dollar value to warrant close inventory control.

1. In general, about 5 (or bigger to 15) percent of all inventory items account for 75 (or 60 to 80) percent of the total money value of inventory. These are classified as A, or Class A, items.
2. Items from Class B represent approximately 20 (to 30) percent of total inventory units but only about 15 (to 30) percent of total inventory dollar value.
3. Items from Class C generally account for 75 (or less to 50) percent of all inventory units but represent only 5 (or more to 10) percent of total dollar value.

You see the different values of percentages. They have theoretical values (see Figure 1), but you may specify own values from the ranges mentioned above on the strength of the features of your company.

Figure 1. Graphical representation of ABC groups

Some companies use A, B, C, C-
(http://www.supplychainmetric.com/inventoryABC.htm)

A = 80%, B = 15%, C = 4%, C- = 1%

Figure 2 illustrates another variant how percentages are chosen.

Figure 2. Another example for percentages ranges
(source: http://www.slideshare.net/odessanazarrea/abc-classification-system)

The steps to conduct an ABC analysis are as follows:

1. Determine annual usage or sales or other indicator for each object.
2. Determine the percentage of the total usage or sales or aggregate indicator by object.
3. Rank the objects from highest to lowest percentage.
4. Classify the objects into groups.

To find out more about ABC Analysis of 

• inventory
• suppliers
• customers
• and other criteria, reasons and fields of application 

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