ABC Inventory Control - Meaning, Importance, Steps & Example

Published in Operations and Supply Chain Terms by MBA Skool Team

What is ABC Inventory Control?

ABC inventory control is a popular method for inventory optimization in supply chain. Under ABC inventory control, the goods are classified in three categories according to their monetary value and accordingly, the manager designs the inventory management policies for the store. This is based on ABC analysis. 

Products are classified under three groups: ‘A’ having the most valuable items, ‘B’ the intermediate ones and ‘C’ the least in terms of value. This objective of the ABC inventory control method is to draw more attention of the inventory manager on the Group A items and less towards Group C items.

Importance of ABC Inventory Control

Let us now introduce a term ‘Annual Consumption Value’ which is the product of annual demand of an item and its cost. It has been observed that the annual consumption value is highest for the products classified under Group A and least for the Group C items.

1. Group A: Products contributes around 70-80% to the annual consumption value of the company and accounts for only 10-20% of the inventory. Inventory manager performs the regular check on the stock and ensures that A items are not stock outs. This requires frequent orders for ‘A’ group items, a secured storage and precise sales forecast from the inventory manager.

2. Group B: These products cover 15-20% of the annual consumption value and accounts for 20-30% of the inventory. A reasonable amount of care has to be taken for this segment.

3. Group C: This segment has maximum share of 60-70% in terms of inventory but contributes very little 15-20% in the consumption value. Inventory manager generally doesn’t pay much attention towards these products and performs a routine check up to ensure the availability as it poses the risk of low value and higher inventory costs.

Figure 1

Example of ABC Inventory Control

Refer to the Table 1. All the items are listed in the below table along with their unit cost and annual demand. The annual consumption value is calculated for each item and its percentage in terms of total annual consumption of the store is evaluated. Based on this percentage, the items are classified as Group A, B and C (Table 2).

Table 1

Table 2

Steps for ABC Inventory Control

The steps to classify inventory into groups are as follows:

1. Determining the annual usage or sales of each item of inventory

2. Determining the percentage of usage or sales of each item as a percentage of total inventory

3. Ranking the various items of inventory based on the percentages calculated

4. Classifying the ranked items into groups

Hence, this concludes the definition of ABC Inventory Control along with its overview.

This article has been researched & authored by the Business Concepts Team. It has been reviewed & published by the MBA Skool Team. The content on MBA Skool has been created for educational & academic purpose only.

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