ABC analysis definition
/What is ABC Analysis?
ABC analysis is used to categorize items into three classifications, based on activity levels. The concept is most commonly applied to inventory, where the "A" classification identifies high-usage items, the "B" classification identifies medium-usage items, and the "C" classification identifies low-usage items. This breakdown can then be used to exercise high levels of monitoring over "A" classification inventory, and the least monitoring over "C" classification inventory. The "A" classification usually involves 5% of the total number of inventory items, while the "C" classification pertains to 80% of the inventory items. The remaining 15% of inventory falls within the "B" classification.
Characteristics that apply to each of these classifications include the following:
"A" classification. Monitored on a daily basis, and replenished at frequent intervals.
"B" classification. Monitored at relatively frequent intervals, and probably replenished using automated inventory system notifications to the purchasing staff.
"C" classification. Monitored at longer intervals, possibly using manual tracking and reordering systems.
Advantages of ABC Analysis
A business with a large investment in inventory will likely find it essential to apply ABC analysis to this asset. By doing so, the firm can cost-effectively monitor inventory, so that the most active items are managed the most closely. This should result in faster inventory turnover, as well as fewer losses due to inventory obsolescence.
Disadvantages of ABC Analysis
The main concern with ABC analysis is that the “C” level inventory items are rarely counted. This can mean that inventory record errors may not be noticed for long periods of time. Another concern is that someone who understands the counting schedule for “C” items could steal them immediately after a count has occurred, knowing that the next count will not be conducted for many months - allowing them enough time to cover their tracks.
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ABC Analysis Applied to Cycle Counting
The ABC concept can be applied to cycle counting, where "A" items are counted the most frequently. This is done to ensure that the most commonly-used items have the highest levels of inventory accuracy, so that there are few inventory record errors that might interfere with production activity.
ABC Analysis Applied to Customers
The ABC analysis concept is also applied to customers, where the "A" customers generate the most profits and the "C" customers generate the least. This analysis is used to concentrate the most marketing attention on "A" customers, while paring away "C" customers that may not be generating any profits at all. The concept can be extended to customer service, where the fastest service response times are given to "A" customers, while "C" customers are accorded much less attention.