ABC Classification

Posted in Operations and Supply Chain Terms, Total Reads: 944
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Definition: ABC Classification

It’s a ranking system where items are grouped according to their usefulness in achieving in business goals. This system requires grouping of things into 3 different categories

A – Most Important

B – Very Important

C – Important


Purpose of doing this classification is identifying things which effect output the most. Low variation in these things can lead to high changes in output. Thus these things are closely monitored thus helping organizations to increase their efficiency. As A category things are more important more attention is given to A and relatively less to B and C.


This system can be used in inventory management system, in production to identify bottlenecks, in HR department to categorize employees, in B2B sales to identify important customers etc


Example- In an inventory management system we can categorize products into ABC classification depending upon their annual sale or percentage sale of the items. High selling items should be categorized as A and managing their inventory should be top priority of inventory management team. A group of items might only be 20% of various types of products available but their business importance or contribution to revenue is 80%.

 

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