Inventory is a major current asset for anyorganization since its associate with many different costs.
Therefore managinginventory is essential which is why the concept of inventory management hasevolved. There are different inventory control techniques deployedby organizations along with their inventory holding costs andpotential profits that comes under the concept of inventory management such asABC analysis, EOQ model, VED analysis, SDE analysis etc.Among these concepts ABC analysis is the one inaction the most. ABC analysis is focusing on identifying items that will have asignificant impact on overall inventory cost. Organizations have variousinventory items.
But all these items are not equally important since they havedifferent values. That is why firms useABC analysis to identify what are the most critical items according to theirvalues.ABC analysis divides an inventory intothree categories.· A – Items with high valuethat needs tight control. (70-80% from total value & 20% from total items)· B – Items that having a moderate value that needs less controlthan A items but greater control than C items. (15-20% from total value &20-30% from total item)· C – Items with low value that need lesser control than both A& B items. (5% from total value, almost negligible & 40-50% from totalno of items)These different categories ofstocks will require different management and controls such as,· Tight controls for Aitems & maintaining high accurate records, optimal order processing &follow up mechanisms · Moderate controlsfor B items & maintaining good records with close attention.
· Lesser controls forC type of items & maintaining simplest records.This ABC concept is very much important because it assistorganizations in recognizing “where the value is”. By focusing on inventoryitems compared to its values, a company can assign proper resources to attainthe optimum inventory levels, reducing inventory costs, ensuring customers’needs are met & gain competitive advantage over the competitors in theirmarket.