## ABC Analysis
ABC Analysis is a value-based inventory classification system. It applies the Pareto principle: a small number of items account for the majority of inventory value.
### Classification
| Category | % of Total Items | % of Inventory Value | Control Level |
|---|---|---|---|
| A | ~10% | ~70% | Tight control — budgets, specific stock levels, regular review |
| B | ~20% | ~20% | Moderate control — periodic review |
| C | ~70% | ~10% | Minimal control — orders placed infrequently (6-monthly or annually) |
> Memory trick: A-items = High value, Low count. C-items = Low value, High count. Think of expensive jewellery (few items, most valuable) vs nuts and bolts (many items, little value).
### Control Approach by Category
A-Items:
- Controlled via budgets and specific stock level settings.
- Aim: prevent both overstocking AND shortages.
- Frequent review, possibly daily.
B-Items:
- Periodic review (e.g., monthly).
- Standard reorder procedures.
C-Items:
- No constant control needed.
- Bulk orders placed infrequently to save on ordering and handling costs.
- Simple visual inspection may suffice.
### Advantages of ABC Analysis
1. Production continuity: A-items always available → no costly production stoppage.
2. Lower costs: Resources focused where they matter; C-items managed cheaply.
3. Efficient resource allocation: Management attention directed at high-value items.
4. Time-saving: Managers avoid spending equal time on all items regardless of value.
### Limitations (not in source, but important for exam)
- Does not consider criticality — a cheap C-item may be critical to production.
- VED (Vital, Essential, Desirable) analysis should supplement ABC for critical items.
- Classification can become outdated if prices or consumption patterns change.