In A-B-C classification, items are classified according to annual usage value. Which is by far the most important aspect of inventory control.

It has been universal experience that a very few items whose annual consumption value is large; contribute significantly to the total inventory holdings of the organization.

On the other hand, there are very large number of items whose annual consumption value is small.

The problem is to segregate items which are most important (A), less important (B) and least important (C) and device a type of control which are adequate for three groups of items.

Steps involved in A-B-C Analysis:

1. List items serially in descending order of their annual usage value not according to their annual usage in units, also not according to their unit prices.
2. This two factors are irrelevant in A-B-C classification. The only relevant factor is annual usage value in Rs./-
3. Strike cumulative total of annual usage value.
4. Draw the first cut off line A-A, where cumulative total of annual usage value is around 70% of the above total.
5. Draw the second cut off line B-B where cumulative total of annual usage value is around 90% of the above total.

Usually 10% of the items accounts for a 70% of the total annual usage value. Next 20% of the items accounts for next 20% of the total annual usage value. And remaining 70% of the items accounts for 10% of the total annual usage value. For large organization which stocks very large number of items, even 10% of the total number of items is quite substantial.

A-B-C analysis is the basic analytical tool which enables the top management to place the efforts where the results will be greatest.

This technique is popularly known as “Always better Control” .This technique tries to analyses the contribution of materials by money value of importance in order to determine its priorities.

This technique has been widely used in areas requiring selective control such as inventory, obsolete stock, and purchase order, receipt of materials, inspection, store keeping and verification of bills.

Advantages of A-B-C analysis

• This approach helps material manager to exercise the selective control and focus his attention only on few items which he confronted with.

• By controlling “A” items and doing proper inventory analysis, obsolete items are automatically pin pointed.

• A-B-C analysis helps in better planning and improved inventory turn-over. Objective of carrying out A-B-C analysis is to develop policy guidelines for selective control.