All inventory is not created equal – compare two pieces of inventory that might exist in an aerospace assembly plant – take a complex Aircraft Engine worth hundreds of thousands of dollars to an individual screw perhaps worth five cents.
Now ask yourself from a materials management perspective would you manage these two parts in exactly the same way? Would you carry out inventory counts the same way with the same frequency – would you execute your procurement transaction in the same way? Worse still would you financially write the stock off in the same way with the same authority levels?
Thought not – but for many manufacturing plants that may have hundreds of thousands of parts – classifying your material in order that you manage it effectively and appropriately can ensure you spend your management time on the parts that matter most.
To facilitate this management, best practice usually dictates that you will classify your material – often into three groups :-
A – Complex and expensive parts that require careful management and control – these typically represent 80% of your inventory spend
B – Moderately complex and expensive material that requires moderate levels of management
C – Low complex – low cost items that are typically commercially available and require little management control.
The ABC Analysis Process
The typical ABC process isn’t overtly complex and consists of a small number of steps – you’ll usually need record the information onto a spreadsheet to simplify the analysis.
1/ Gather the data
Typically ABC Analysis is reviewed by gathering, as a minimum
a) a list of part numbers from the ERP system
b) Obtaining the cost data for each part
c) Obtaining it’s consumption volume over a specific period
d) Calculating the consumption value for each part
2/ Calculating the consumption value
The consumption value is calculated by multiplying the item cost by the quantity used in the period.
3/ Grouping your parts
Parts are grouped by the consumption value and typically split into 3 bands (note the %’s used here are for indicative purposes and your own organization may benefit from different bands).
a) Band A – Material where the consumption value represents approximately 80% of the total consumption value –this will be typically your high cost items
b) Band B – Material where the consumption value represents approximately 15% of the overall value
c) Band C – Material where the consumption value represents approximately 5% of the overall value.
ABC Analysis – Next steps
Once you have classified your parts (and in many ERP systems you are able to populate the classification data against the part in the parts master record). You are can use this data to drive key materials management activity. For example co-ordinating your perpetual inventory management activity – you may routinely verify your Category A parts on a monthly basis but only review your category C parts twice a year.
You may use scheduled orders for your Category C parts but may require detailed purchase orders and negotiation for your Category A parts.
Carrying out an ABC analysis on your inventory can provide the foundation for streamlining your materials management processes – focusing your time and effort on the parts that need it most – ensuring that your processes are appropriately configured for the various materials that you manage.