Large organisations are required to maintain stocks of different materials. For maintaining the account of recent and issue of these materials and controlling these inventories, it is essential to employ a number of clerks whose salary may run in lakhs. The main aim to employ staff for inventory control should necessarily be the least cost on clerical staff. So, items like pins, paper-clips, rubber-bands, which are use in office are not worth keeping record of. For such items, it is cheaper to withstand the loss than to keep its record.
The above figure shows a graph between the percentage of total number of items held in stock and the percentage of total stock value. It can be seen from the graph that the No. of items held in stock of item A is only 10% but its cost contribution is to the extent of 70% of the total stock value. Therefore, items ‘A’ should be controlled very carefully and ordering quantities should be kept as small as possible. On the other hand, the percentage of items ‘C’ in stock is 70% but its contribution is only 10% of the total stock value. So, items ‘C’ require minimum supervision. Items ‘B’ are medium valued and their number lies between ‘A’ and ‘C’ items.
Following are the important features of ‘ABC’ Analysis :
- To find out which of the items should be controlled loosely.
- To find out which of the items should be controlled closely.
- It becomes easy to separate the items from store record. One can distinguish which items are ‘trivial’ and which are ‘vital’.
- Classify the items into ‘A’, ‘B’ and ‘C’ according to the investment involved an them.
- ‘A’ needs full record-keeping treatment.
- Items in ‘B’ under this group must receive medium treatment, as they are less important than the items in ‘A’ but are more important than the items in ‘C’, ‘B’ needs maximum-minimum stock limit and standard record-keeping.
- ‘C’ may not require much treatment of record keeping as they are rather trivial items. They are many in number. Keep their inventories as low as possible. For these items, there may not be any necessity of following requisition formalities. It is enough to watch over the levels of stock.
- ‘C’ items can be charged to overhead account, there is saving in record-keeping of this item.
- Organisation must pay full attention to the purchase of ‘A’ items and should keep a constant watch on the stock position of these items.
Example
Suppose an organisation is having 1000 items in its inventory. ‘A’ item are 100 in number, ‘B’ items are 200 and ‘C’ items are 700.
| Items | Value of 1 month’s requirement | Value of 3 months requirement | Value of inventory as per ABC Technique |
| ‘A’ items 100 ‘B’ items 200 ‘C’ items 700 | Rs. 700/- Rs. 600/- Rs. 300/- | Rs. 2,100/- Rs. 600/- Rs. 300/- | Rs. 350/- (1/2 months stock) Rs. 300/- (1.1/2 monts stock) Rs. 300/- (3 months stock) |
| | Total : | Rs. 3,000/- | Rs. 950/- |
It should be seen from the above example that, if the organisation decides to keep stock of all the items sufficient for three months the value of the requirement would be Rs. 3,000/-. If ABC technique is applied, the inventory cost would work out to be Rs. 950/-. It means that the value is reduced to Rs. 2,150/- when the ABC technique is applied. Due to reduction in the capital investment the interest to be paid on the investment is less. This amount can be utilised for some other purpose. Thus, the saving in interest and additional income from investment of the amount saved results into an increase in the profit margin. Thus, the technique is said to be efficiently used.
