The Benefits of ABC Analysis for Inventory Reduction
by Bruce D. Caldwell, C.P.M.
President, CAPM

Inventory reduction has been a constant goal for all companies over the years. The shorter the time from customer order to cash in the bank the better. The fewer dollars tied up in inventory, the more money available for capital investment and expansion. Once a company accepts inventory as waste and not a necessary evil of business, inventory investment will be reduced to levels once thought impossible.

Using the "ABC" concept to analyze and control inventory investment and turns is the simplest and most efficient method. Most inventories are made up of hundreds and possibly thousands of individual items necessary to manufacture a company’s products. By rank ordering the inventory items in dollar terms, A items being the most expensive to C items being the least expensive, managing inventory investment can be broken down to a manageable level. "A" items usually make up 50 to 60% of inventory dollars; however, they only account for normally 10 to 20% of inventoried items. "B" items usually make up 30 to 40% of inventory dollars and only account for normally 30 to 40% of inventoried items. "C" items usually make up 5 to 10% of inventory dollars and account for normally 40 to 50% of inventoried items. By managing the "A" items, a positive impact can be made in inventory investment reduction. Reducing one or two "A" items can and will have a bigger impact on inventory reduction and increased inventory turns, greater than a possible reduction in all "C" items.

Also, "ABC" classifications can be used to design cycle counting schemes. Count "A" items more often than "B" items and "C" items possibly not at all. The "ABC" concept allows a manager to devote resources where it will have the biggest positive impact. Management by Exception!