Overview of ABC Analysis

ABC analysis is an inventory categorization technique, which determines the relative value of a group of inventory items based on a user-specified valuation criterion.

Using ABC analysis you can identify items that will have a significant impact on overall inventory cost, while also identifying different categories of stock that will require different management and controls. ABC refers to the ranking you assign your items in order of their estimated importance suggesting that inventories of an organization aren't of equal value, such as items classified as:

• A items are very important for an organization and are very tightly controlled and accurate records are maintained

• B items are important, but less important than A items and more important than C items and are less tightly controlled and good records are maintained

• C items are marginally important with the simplest controls possible and minimal records are maintained

Typically, you use ABC analysis as the basis for defining the frequency in which items are cycle counted. The frequency with which you count your items depends upon criticality of the item, cost of the item, lead time of the item, past stock movements of the item as well as other criteria.