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Inventory is a major current asset for any organization since its associate with many different costs. Therefore managing inventory is essential which is why the concept of inventory management has evolved. There are different inventory control techniques deployed by organizations along with their inventory holding costs and potential profits that comes under the concept of inventory management such as ABC analysis, EOQ model, VED analysis, SDE analysis etc.
Among these concepts ABC analysis is the one in action the most. ABC analysis is focusing on identifying items that will have a significant impact on overall inventory cost. Organizations have various inventory items. But all these items are not equally important since they have different values. That is why firms use ABC analysis to identify what are the most critical items according to their values.
ABC analysis divides an inventory into three categories.
A – Items with high value that needs tight control. (70-80% from total value & 20% from total items)
B – Items that having a moderate value that needs less control than A items but greater control than C items. (15-20% from total value & 20-30% from total item)
C – Items with low value that need lesser control than both A & B items. (5% from total value, almost negligible & 40-50% from total no of items)
These different categories of stocks will require different management and controls such as:
This ABC concept is very much important because it assist organizations in recognizing “where the value is”. By focusing on inventory items compared to its values, a company can assign proper resources to attain the optimum inventory levels, reducing inventory costs, ensuring customers’ needs are met & gain competitive advantage over the competitors in their market.
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