ABC inventory classification is a way of describing inventory in terms of most important (A) to least important (C). The ranking criteria can be based on a number of factors determined during the classification process. Factors include:
- Potential for obsolescence
- Critical product of service element
- Validation and tooling time
When analyzed, inventory management priority is given to A items first, B items second and C items last. This permits selective inventory control. Simple policies based on ABC analysis could look like this:
- A Group: tight control, accurate records and supplier development / relationship
- B Group: less tightly controlled and good records and supplier audit
- C Group: simplest controls possible and minimal records and Vendor Managed Inventory (VMI)
20 Keys of Inventory Management
Within the 20 Keys of Inventory Management by Kaufman Global, Key #9 (Inventory Strategy) addresses ABC Inventory Classification as follows:
1 Traditional – The usual mess; reactive, little standard work, many problems and most are accepted as “The way it is…”
Inventory is received and put away. Lost items are common. No ABC analysis performed. Inventory is the only known, effective way to reduce cycle time. Slow moving items represent big problems. Location control is not used, as it is too difficult to maintain.
2 Learning – Awareness established; first small steps taken
Main stores inventory is in a secured location, and control is starting to be implemented. ABC analysis is performed. Inventory turns (aggregate) is being measured and communicated to the Purchasing group and / or Inventory control group. A service factor or % of order filled the first time is being looked at for improvement. VMI (Vendor Managed Inventory) concepts ( initially for consumables at least) are being considered and initial candidate items are being put in a comprehensive list.
3 Leading – System installed; frequent glitches, sometimes serious
Inventory strategies per group of items, commodities have been developed for 50% of the items. Target for turns by product and group have been established and action plan developed and being executed to achieve goals. Policy to address slow-moving and obsolete inventory is in place. Location control implemented where appropriate, and inventory record accuracy is >95%.
4 World-Class – World-class, outstanding but not quite always automatic
Inventory strategies in place to support the enterprise’s business objectives for service level, turns, quality and cost reduction. Processes in Inventory and Purchasing groups support Vendor Managed Inventory and Kanban
5 Currently Invincible – Seamless, transparent automatic excellence
Inventory accuracy always above 98% on cost and count. Changes in new product introduction and phase out are being handled seamlessly.« Back to Glossary Index