ABC System

Posted in Operations and Supply Chain Terms, Total Reads: 3283

Definition: ABC System

ABC System is a method of Inventory Management that classifies inventories into 3 groups- Group A, Group B and Group C. An important feature of ABC system is that it recognises the fact that items held as inventory are not of equal importance as the amount invested, the potential profits, sales and usage differ.

ABC System helps inventory managers to assign priorities for inventory control. The categorization helps to keep a better check on items of high value.

Classification under ABC System:

Group A

Group B

Group C

  • High rupee value but a small portion of total inventory (Approx. 10%)

  • These items are reviewed on a regular basis
  • Medium rupee value and accounts for about 20% of total inventory usage
  • The frequency of review of items is less than Group A but more than Group C
  • Low rupee value but account for approximately 70% of total inventory usage
  • These items are not reviewed and orders are placed directly

Steps for inventory classification:

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

Example of ABC System:

If Mr. X is a computer shop owner, his inventory classification shall be as follows:

Group A: 20 laptops of Rs. 25000 each

Group B: 20 Printers of Rs. 5000 each, 20 speakers of Rs. 2000 each, 5 RAM of Rs.4000 each, etc

Group C: 50 Mouse of Rs.500 each, 30 keyboards of Rs.250 each, 60 Mousepads of Rs.100 each, 40 USB cords of Rs.50 each, etc.

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

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