Answer to Question #97741 in Economics for Bin Aftab

Question

Provide an example of ABC classification in a business you are familiar with. What would be the A inventory items versus B and C? What ordering policies would you use for each of these?

Answer 1

ABC analysis is a system for inventory control used during material and distribution management. It is identified as selective inventory control or SIC. ABC analysis can be put to use for a wide range of inventory items, such as manufactured products, components, spare parts, finished goods, unfinished goods, or sub-assemblies.

Any type of objects is used on the inventory, the approach works by setting them all into three different categories. Therefore, ABC analysis is a system of classification using three classes, each of which has different management controls. 

A, B & C Classification

• A items 15-20% of items that account for 75-80% of annual inventory value. Goods which annual consumption value is the highest.

• B items 30-40% of items that account for 15% of annual inventory value and medium consumption value

• C items 40-50% of items that account for 10-15% of annual inventory value. Goods which lower consumption and value.

Ex: Automobile service station 

Inventory Item:

Windshield wipers 

Radiator caps

Gasoline

Tires

Batteries

Oil

Transmission fluid

Value systems

Fan belt

Reference 

https://www.eazystock.com/blog/how-does-abc-analysis-affect-inventory-optimization/

https://www.researchgate.net/figure/ABC-classification-into-three-groups_fig1_322148398