Inventory Classification - ABC Classification, Advantages & Disadvantages
Inventory is a necessary evil in any organization engaged in production, sale or trading of products. Inventory is held in various forms including Raw Materials, Semi Finished Goods, Finished Goods and Spares.
Every unit of inventory has an economic value and is considered an asset of the organization irrespective of where the inventory is located or in which form it is available. Even scrap has residual economic value attached to it.
Depending upon the nature of business, the inventory holding patterns may vary. While in some cases the inventory may be very high in value, in some other cases inventory may be very high in volumes and number of SKU. Inventory may be help physically at the manufacturing locations or in a third party warehouse location.
Inventory Controllers are engaged in managing Inventory. Inventory management involves several critical areas. Primary focus of inventory controllers is to maintain optimum inventory levels and determine order/replenishment schedules and quantities. They try to balance inventory all the time and maintain optimum levels to avoid excess inventory or lower inventory, which can cause damage to the business.
Inventory in any organization can run in thousands of part numbers or classifications and millions of part numbers in quantity. Therefore inventory is required to be classified with some logic to be able to manage the same.
In most of the organizations inventory is categorized according to ABC Classification Method, which is based on pareto principle. Here the inventory is classified based on the value of the units. The principle applied here is based on 80/20 principles. Accordingly the classification can be as under:
A Category Items Comprise 20% of SKU & Contribute to 80% of $ spend.
B Category Items Comprise 30% of SKU & Contribute to 15% of $ spend.
C Category Items Comprise 50% of SKU & Contribute to 5% of $ spend.
The above is only an illustration and the actual numbers as well as percentages can vary.
Example: Table of Inventory Listing by Dollar Usage Percentage.
|Item||Annual Usage in No. Units||Unit Cost-$||Usage in Dollars||Percentage of Total Dollar Usage|
Advantages of ABC Classification
Example: Take the case of a Computer Manufacturing Plant; the various items of inventory can be broadly classified as under:
|SKU Description||Classification of Inventory||Remarks|
|Processor Chips||A Class||Kept under High Value Storage/Asset Tracking/Access Control required|
|Memory Chips||A Class||Kept under High Value Storage/Asset Tracking/Access Control required|
|Hard Disk/Storage Media||A Class||Kept under High Value Storage/Asset Tracking/Access Control required|
|Software License||A Class||Kept under High Value Storage/Asset Tracking/Access Control required|
|Disk Drives||A Class||Normal Storage/Access Control Required|
|Cabinet/Case||B Class||Normal Procedures|
|Battery Pack||B Class||Normal Procedures|
|Monitor||A Class||Normal Storage/Access Control Required|
|Keyboard||B Class||Normal Procedures|
|Training Manuals||C Class||Minimal Procedures|
|Mouse||B Class||Normal Procedures|
|Stickers||C Class||Minimal Procedures|
|Screws & Nuts||C Class||Minimal Procedures|
|Power Cord||C Class||Minimal Procedures|
|Starter Assembly Pack-Instructions||C Class||Minimal Procedures|
- When to avoid Holding Inventories
- Types of Inventories
- Components of Inventory Costs
- Finished Goods Inventory Classification
- Inventory Control
Authorship/Referencing - About the Author(s)
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