ABC ANALYSIS

ABC analysis is a selective inventory management technique in which we group items in a few
discrete categories depending up on value, criticality and frequency of their usage. This is based on
Paretos law that a few high usage items constitute a major part of capital invested in inventories, where
as bulk items of the inventory, having low value constitute insignificant part of the inventory. For
example only 20% of the items may be accounting for the total material cost annually.

In ABC analysis (Always Better Control or Always Be Careful system) contemplates to classify all
the inventory items in to three categories based on their usage values. Items of high value but high in
number are classified as A items and would be under strict control, C items are large in number but
require less capital and would be under simple control. Items of moderate value and size are classified as
B items and would attract reasonable attention from the management.

The following distribution pattern is generally followed in ABC analysis.

A: 5 to 10% of the total number of items accounting for 70 to 80% of the annual usage value.

B: 10 to 20% accounting for about 15 to 20% of the annual usage value.

C: 70 to 80 % accounting for 5 to 15% of the annual usage value.

Average annual usage value( X)=

A class items 6X

C lass items 0.5X

In between we have B class items

A class items require continuous and rigorous control whereas B class items may have relaxed control
and C class items may be procured using rule of the thumb.
Example 1. The following table lists a number of items used in a medium sized industry.Classify the items
under A,B,C category.

Item No Annual consumption( in pieces) Unit price ( in paise )

01 30,000 10
02 2,80,000 15
03 3,000 10
04 1,10,000 5
05 4,000 5
06 2,20,000 10
07 15,000 5
08 80,000 5
09 60,000 15
10 8,000 10

Solution: Table 1

Item Annual Unit price Usage value (Rs) Ranking(as

No consumption( in ( in paise ) per usage
pieces) value)
(1) (2) (3) (4)= (2) x (3) /100 (5)
01 30,000 10 3,000 6
02 2,80,000 15 42,000 1
03 3,000 10 300 9
04 1,10,000 5 5,500 4
05 4,000 5 200 10
06 2,20,000 10 22,000 2
07 15,000 5 750 8
08 80,000 5 4,000 5
09 60,000 15 9,000 3
10 8,000 10 800 7
 Table 2.Accumulate the total number of items and their usage value and then convert the
accumulated values into % of grand total

Rank Item No Category Annual Cumulative annual % % of the

usage (Rs) usage (Rs) Cumulative item
usage
1 02 A 42,000 42,000 48* 10
2 06 22,000 64,000 73 20
3 09 9,000 73,000 83 30
4 04 B 5,500 78,500 90 40
5 08 4,000 82,500 95 50
6 01 3,000 85,500 98 60
7 10 800 86,300 98.6 70
8 07 750 87,050 99.4 80
9 03 C 300 87,350 99.6 90
10 05 200 87,550 100 100

*(42,000/87550) X 100 = 48%.Also % of the items is (1 item/10 items) x 100 = 10% and so on.

100

90

80

Cumulativ 70
e % of
60
usage
items 50 C
B
40 Rs.2%
Rs.25%
30 q-40%
q-40%
20

10

0
10 20 30 40 50 60 70 80 90 100

Cumulative % of items
A

Rs.73%, q-20%