ABC inventory management

Background

ABC inventory management began with Pareto and 80/20 principle that he developed. He made this discovery when he studied how wealth was distributed among the Italian population. He discovered that only 20% of Italian population owned 80% of the land. He also noticed that only 20% of pea pods produced 80% of the peas in his farm. He then came up with 80/20 principle. The principle then evolved to ABC analysis. In this analysis, A group contains the most important products which are able to generate over 80% of the turnover. B comprises of the less important products. These are those which account for 15% of an organization turnover. C was used to refer to the long tail products. These are those which less contribute to income but are important for half of the number of an organization’s products. They generate 5% of the turnover.

How it works

ABC inventory management system is used to group items according to the issue value that they earn annually. Grouping of these items is done in terms of money with the aim of identifying the small number of items that are used in these organizations and are important for most of the issue value. This indicates the items that need to be controlled for effective management of inventory. The emphasis in this model is putting effort in areas where the most effect will be obtained. For them, there should be strict control on A and B items and at the same time considering rather a low safety stock option. The items in group C can be kept with a looser control and a high stock level.

Importance of ABC inventory management

When you are searching what are the four basic management styles, don't forget about ABC inventory management. ABC inventory management is important for managers in assigning priorities for the right control of inventories. The ABC concept has emphasis on the situation that all the items in the resources are important and has the ability of effecting sales or production to a customer or to the operations. Categories are important in better control of inventory. Together with other management techniques and procedures, the classifications can be used in designing cycle counting schemes. Grouping of inventory through the model is also important in reducing investment. Under the analysis, items in group A are purchased in lower qualities as compared to the others as much as possible. Through this, the delivery period is also reduced and hence reduction in investing in material. Time is also saved when the method is applied. There is a significant effort made when the management considers reducing the purchases of materials in group A. This saves time.

Opinion

Through ABC inventory management, the analysis that managers place on their inventories have been tighter and they are able to control high-priority inventory. Organization management should apply this method in their inventory due to the advantages it has over the other inventory management tools. Through the method, the managers will be able to make the efficient cycles count. With the method, they will be able to effectively allocate there resources effectively during cycle counts. In every organization, management is concerned with saving time and labor. This is achievable though ABC model. With all these mentioned, the method however conflicts with the other cost systems. The analysis does not meet the general accounting principles and also with the traditional costing systems. Inventory management has to consider this.