Wednesday, August 6, 2008

ABC analysis - inventory mangement tool

A simple, common and powerful tool for inventory management is ABC analysis. It is based on Pareto's law of "80-20."Typically, the top 10 to 15% of items account for 75-85% of value ("A" items), the next 20-30% account for 10-20% of value ("B" items) and everything else accounts for the rest, about 60-70% of the items, usually about 5% of the total value ("C" items). Your inventory should be less than these percentages for the "A" items, because they are much more tightly controlled and a little higher for B's and significantly higher for C's.
Then compare the list to actual values in inventory, plus actual and planned commitments.An ABC list suggests what to concentrate on to control most of the inventory investment.Err on the side of caution for the cheaper items, allowing a safety stock coverage or "two bin" approach to avoid stock outs, but keep inventory from getting out of control.

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