ABC analysis is a form of control over stores. Its full name is Always Bola control and it is also known as Selection Control or Discriminating control. Efficient control of store requires greater care in case of costlier items . The of certain concerns consist of a small number of items representing a major portion of the inventory value and a large number of items representing only a minor portion of the inventory value. In case of such concerns a selective approach to stores control is necessary.
The ABC system of inventory control satisfies this requirement. It means a discriminating control for different articles on the basis of the investment involved. Usually the items in stores can be divided into three categories mentioned below:
(i) ‘A’ category will include those items that require heavy investment because of high prices and heavy requirements-the number of items involved will usually be small and will consist of raw materials and chief stores.
(ii) ‘B’ category may consist of less costly items; and
(iii) ‘C’ category will consist of those items that do not require much investment-the number of such items is usually large.
While exercising control over stores, items of category A should be given the utmost attention. Their levels of stock should be strictly controlled. There is not much need for exercising constant control over the stock of category C. It will be economical to place a large order once because of low cost, the cost of carrying the inventory will be small and the cost of placing orders again will be avoided.
For items of B category, orders may be placed on a review basis, the position being viewed each month and orders being placed, if necessary. But for items in category A, there must be a regular system to see that there is no over-stocking as well as that there is no danger of production being interrupted for want of material. For such items, minimum and maximum stock limits have to be worked out and order placed with great care.
Thus, the technique of ABC control is based on the principle of management by exception’, i.e. critical areas have to be more cared for than others. The success of this system depends to a large extent upon constant revision of categories. The circumstances may change and, therefore, items may have to he shifted from one category to the other. It should be done periodically.
Advantages of ABC Analysis in Inventory Control
The system has following advantages
(1) It ensures closer control on costly items in which a large amount of capital has been invested.
(2) It helps in developing a scientific procedure of controlling inventories. The cost of placing orders, receiving goods and maintaining stock is minimized spec Tally if the system is coupled with determination of proper economic order quantities.
(3) Management’s time is saved since attention need be paid only to some of the items having more value.
(4) The purchasing procedure may be streamlined with the help of this technique.
(5) It helps in achieving the main objectives of inventory control at minimum possible costs.
(6) The introduction of this system for inventory control will suggest other areas also where this principle can be applied easily and efficiently. The following example will illustrate the technique well.