BACK TO BASICS WITH ABC'S OF INVENTORY

by Kathleen J. Pennise, member of the ACA Group

When was the last time your inventory had a basic ABC analysis? With the dynamics and
constant pressures of controlling costs and supply demands that the business world has
been seeing over the last year it just might be time again. The benefits gained by
understanding the classification of your inventory could be to your advantage in this
rough market.

ABC analysis helps you determine where you want to focus your efforts in managing
your inventory. You get to see your inventory in a different light. The analysis separates
the most significant items from the least important and is used to determine the degree
and level of control for your inventory items.

How is this done? The analysis is based on a simple rule that approximately 80% of your
inventory value is represented by 20% of your items. A quick example is: you have an
inventory level of 1.5 million and you have 1200 items. You would then look at annual
dollar usage (history or projected) for each item and rank them in order of percentage of
aggregate usage. What you will find is that approximately 240 items will represent 1.2
million dollars of your inventory. You will then classify the next 15% or so of the
inventory value as your “B” items, approximately 360 items. The balance or 600 items
will be classified as “C” items.

There are also several factors to think about when you are doing this analysis- do you
want to include all items that are in your inventory? You might want to exclude items that
have not had any activity for the past 18 months. You also might want to do a separate
analysis on your purchase items versus your manufactured items. There will also be items
that you just need to keep in on that “A” list due to quality, scarcity of the material or
lead time factors. I would also think about who should be involved in the analysis- a
group effort? Inventory Management, Purchasing, Engineering and Accounting. Once it
is done; who will maintain the list, how frequent should the analysis be done, how do you
handle newly designed items, is a procedure written?

Now that you have this list of 240 “A” items you can minimize your efforts and manage
the items that will give you the biggest payoff. These items should have tighter controls
on inventory records, more frequent reviews of forecasting and safety stock levels and a
concentration of cost reductions.

On going reviews of your inventory is very beneficial as you can see from above. ABC
Analysis is also a first step towards elimination of Physical Inventory, which will be the
next topic in our newsletter.

If you would like help with analyzing your inventory, contact kp@theacagroup.com. We
can provide some tools that make the ABC Analysis easier and can be tailored to your
specific inventory needs.

Contact Kathleen Pennise (kp@theacagroup.com)