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ABC analysis
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<h2 id="abc-analysis-categories">ABC analysis categories</h2> <p>There are no fixed thresholds for each class, and different proportions can be applied based on objectives and criteria which vary between companies.<a class="footnote-ref" id="fnref:3" href="#fn:3"><sup>3</sup></a> ABC analysis is similar to the <a href="/facts/Pareto_principle/zDIQRlaC">Pareto principle</a> in that the 'A' items will typically account for a large proportion of the overall value, but a small percentage of the number of items.<a class="footnote-ref" id="fnref:4" href="#fn:4"><sup>4</sup></a> Examples of ABC class are: </p> <ul><li>'A' items – 20% of the items account for 70% of the annual consumption value of the items</li> <li>'B' items – 30% of the items account for 25% of the annual consumption value of the items</li> <li>'C' items – 50% of the items account for 5% of the annual consumption value of the items</li></ul> <p>Another recommended breakdown of ABC classes:<a class="footnote-ref" id="fnref:5" href="#fn:5"><sup>5</sup></a> </p> <ol><li>"A" approximately 10% of items or 66.6% of value</li> <li>"B" approximately 20% of items or 23.3% of value</li> <li>"C" approximately 70% of items or 10.1% of value of the items</li></ol> <h2 id="abc-analysis-in-erp-packages">ABC analysis in ERP packages</h2> <p>Major <a href="/facts/Enterprise_resource_planning/IHhjWH4z">ERP</a> packages have built-in function of ABC analysis. User can execute ABC analysis based on user defined criteria and system apply ABC code to items (parts). </p><p>In the absence of an ERP system, ABC Analysis can also be done in MS Excel. </p> <h2 id="mathematical-calculation-of-abc-analysis">Mathematical calculation of ABC analysis</h2> <p>Computed (calculated) ABC analysis delivers a precise mathematical calculation of the limits for the ABC classes.<a class="footnote-ref" id="fnref:6" href="#fn:6"><sup>6</sup></a> It uses an optimization of cost (i.e. number of items) versus yield (i.e. sum of their estimated importance). Computed ABC was, for example, applied to feature selection for biomedical data,<a class="footnote-ref" id="fnref:7" href="#fn:7"><sup>7</sup></a> business process management<a class="footnote-ref" id="fnref:8" href="#fn:8"><sup>8</sup></a> and <a href="/facts/Bankruptcy_prediction/6FsWGg8a">bankruptcy prediction</a>.<a class="footnote-ref" id="fnref:9" href="#fn:9"><sup>9</sup></a> </p> <h2 id="example-of-the-application-of-weighed-operation-based-on-abc-class">Example of the application of weighed operation based on ABC class</h2> <p>Actual distribution of ABC class in the electronics manufacturing company with 4,051 active parts. </p> Distribution of ABC class<table><tbody><tr><th>ABC class</th><th>Number of items</th><th>Total amount required</th></tr><tr><td>A</td><td>20%</td><td>60%</td></tr><tr><td>B</td><td>20%</td><td>20%</td></tr><tr><td>C</td><td>60%</td><td>20%</td></tr><tr><td>Total</td><td>100%</td><td>100%</td></tr></tbody></table> <p>Using this distribution of ABC class and change total number of the parts to 14,213. </p> <ul><li>Uniform purchase</li></ul> <p>When equal purchasing policy is applied to all 14,213 components, for example weekly delivery and re-order point (safety stock) of two weeks' supply, the factory will have 16,000 deliveries in four weeks and average inventory will be 2+1⁄2 weeks' supply. </p> Application of weighed purchasing condition<table><tbody><tr><th colspan="2">Uniform condition</th><th colspan="2">Weighed condition</th></tr><tr><th>Items</th><th>Conditions</th><th>Items</th><th>Conditions</th></tr><tr><td rowspan="3">All items 14,213</td><td rowspan="3">Re-order point=2 weeks' supplyDelivery frequency=weekly</td><td>A-class items 200</td><td>Re-order point=1 week's supplyDelivery frequency=weekly</td></tr><tr><td>B-class items 400</td><td>Re-order point=2 weeks' supplyDelivery frequency=bi-weekly</td></tr><tr><td>C-class items 3,400</td><td>Re-order point=3 weeks' supplyDelivery frequency=every 4 weeks</td></tr></tbody></table> <ul><li>Weighed purchase</li></ul> <p>In comparison, when weighed purchasing policy is applied based on ABC class, for example C class monthly (every four weeks) delivery with re-order point of three weeks' supply, B class bi-weekly delivery with re-order point of 2 weeks' supply, A class weekly delivery with re-order point of 1 week's supply, total number of delivery in 4 weeks will be (A 200×4=800)+(B 400×2=800)+(C 3,400×1=3,400)=5,000 and average inventory will be (A 75%×1.5weeks)+(B 15%x3 weeks)+(C 10%×3.5 weeks)=1.925 weeks' supply. </p> Comparison of "equal" and "weighed" purchase (4 weeks span)<table><tbody><tr><th rowspan="2">ABC class</th><th rowspan="2">No of items</th><th rowspan="2">% of total value</th><th colspan="2">Equal purchase</th><th colspan="2">Weighed purchase</th><th rowspan="2">note</th></tr><tr><th>No of delivery in 4 weeks</th><th>average supply level</th><th>No of delivery in 4 weeks</th><th>average supply level</th></tr><tr><td>A</td><td>200</td><td>75%</td><td>800</td><td>2.5 weeks</td><td>800</td><td>1.5 weeksa</td><td>same delivery frequency, safety stock reduced from 2.5 to 1.5 weeksa, require tighter control with more man-hours.</td></tr><tr><td>B</td><td>400</td><td>15%</td><td>1600</td><td>2.5 weeks</td><td>800</td><td>3 weeks</td><td>increased safety stock level by 20%, delivery frequency reduced to half. Fewer man-hours required.</td></tr><tr><td>C</td><td>3400</td><td>10%</td><td>13,600</td><td>2.5 weeks</td><td>3,400</td><td>3.5 weeks</td><td>increased safety stock from 2.5 to 3.5 weeks' supply, delivery frequency is one quarter. Drastically reduced man-hour requirement.</td></tr><tr><td>Total</td><td>4,000</td><td>100%</td><td>16,000</td><td>2.5 weeks</td><td>5,000</td><td>1.925 weeks</td><td>average inventory value reduced by 23%, delivery frequency reduced by 69%. Overall reduction of man-hour requirement.</td></tr></tbody></table> <p>a) A class item can be applied much tighter control like <a href="/facts/Just-in-time_manufacturing/h4dNAj42">JIT</a> daily delivery. If daily delivery with one day stock is applied, delivery frequency will be 4,000 and average inventory level of A class item will be 1.5 days' supply and total inventory level will be 1.025 weeks' supply, a reduction of inventory by 59%. Total delivery frequency is also reduced to half from 16,000 to 8,200. </p> <ul><li>Result</li></ul> <p>By applying weighed control based on ABC classification, required man-hours and inventory level are drastically reduced. </p> <ul><li>Alternate way of finding ABC analysis:-</li></ul> <p>The ABC concept is based on Pareto's law.<a class="footnote-ref" id="fnref:10" href="#fn:10"><sup>10</sup></a> If too much inventory is kept, the ABC analysis can be performed on a sample. After obtaining the random sample, the following steps are carried out for the ABC analysis. </p> <ul><li>Step 1: Compute the annual usage value for every item in the sample by multiplying the annual requirements by the cost per unit.</li> <li>Step 2: Arrange the items in descending order of the usage value calculated above.</li> <li>Step 3: Make a cumulative total of the number of items and the usage value.</li> <li>Step 4: Convert the cumulative total of the number of items and usage values into a percentage of their grand totals.</li> <li>Step 5: Draw a graph connecting cumulative % items and cumulative % usage value. The graph is divided approximately into three segments, where the curve sharply changes its shape. This indicates the three segments A, B and C.</li></ul> <h2 id="see-also">See also</h2> <ul><li><a href="/facts/Stock_management/0axHmdgl">Stock management</a></li></ul> <h2 id="external-links">External links</h2> <ul><li>SAP library <a href="http://help.sap.com/saphelp_46c/helpdata/en/c1/375b7e449a11d188fe0000e8322f96/content.htm">ABC Analysis</a></li> <li>Oracle <a href="http://download.oracle.com/docs/cd/A60725_05/html/comnls/us/inv/abcov.htm">Overview of ABC Analysis</a></li> <li>ABC Analysis in <a href="https://abcsupplychain.com/abc-analysis/">MS Excel</a></li> <li>ABC Analysis in <a href="https://cran.r-project.org/web/packages/matman/">R</a></li></ul> <h2 id="references">References</h2> <ol> <li id="fn:1"><p>Thomas E. Vollmann, Manufacturing planning and control systems for supply chain management <a href="#fnref:1" class="footnote-back-ref">↩</a></p></li> <li id="fn:2"><p>Lun, Lai, Cheng (2010) Shipping and Logistics Management, p. 158 <a href="#fnref:2" class="footnote-back-ref">↩</a></p></li> <li id="fn:3"><p>Wong, C., Using ABC Analysis for Inventory Control, APICS Redwood Empire Chapter, last updated on 10 February 2006, archived on 26 August 2009, accessed on 14 July 2024 <a href="https://web.archive.org/web/20090826174905/http://www.apics-redwood.org/articles/art0302BCW.htm" target="_blank">https://web.archive.org/web/20090826174905/http://www.apics-redwood.org/articles/art0302BCW.htm</a> <a href="#fnref:3" class="footnote-back-ref">↩</a></p></li> <li id="fn:4"><p>Purchasing and Supply Chain Management By Kenneth Lysons, Brian Farrington <a href="#fnref:4" class="footnote-back-ref">↩</a></p></li> <li id="fn:5"><p>Wild, T., Best Practice in Inventory Management, (2nd Ed., p. 40) <a href="#fnref:5" class="footnote-back-ref">↩</a></p></li> <li id="fn:6"><p>Ultsch, Alfred, Jörn Lötsch. "Computed ABC analysis for rational selection of most informative variables in multivariate data." PLOS One 10.6 (2015): e0129767. <a href="#fnref:6" class="footnote-back-ref">↩</a></p></li> <li id="fn:7"><p>Kringel, D., Ultsch, A., Zimmermann, M., Jansen, J. P., Ilias, W., Freynhagen, R., ... & Resch, E. (2016). Emergent biomarker derived from next-generation sequencing to identify pain patients requiring uncommonly high opioid doses. The pharmacogenomics journal. <a href="#fnref:7" class="footnote-back-ref">↩</a></p></li> <li id="fn:8"><p>Iovanella, A.: Vital few e trivial many, Il Punto, pp 10-13, July, 2017. <a href="#fnref:8" class="footnote-back-ref">↩</a></p></li> <li id="fn:9"><p>Barbara Pawelek, Jozef Pociecha, Mateusz Baryla, ABC Anal-ysis in Corporate Bankruptcy Prediction, Abstracts of the IFCS Conference, p 17, Tokyo, Japan,2017 <a href="#fnref:9" class="footnote-back-ref">↩</a></p></li> <li id="fn:10"><p>Pareto's law in this example is that a few high usage value items constitute a major part of the capital invested in inventories whereas a large number of items having low usage value constitute an insignificant part of the capital. <a href="#fnref:10" class="footnote-back-ref">↩</a></p></li> </ol>