How often should ABC classification of items be reviewed?

ABC classification is a method for determining level of control and frequency of review of inventory items

A Pareto analysis can be done to segment items into value categories depending on annual dollar volume

The ABC approach states that a company should rate items from A to C, basing its ratings on the following rules:

A-items are goods which annual consumption value is the highest; the top70-80% of the annual consumption value of the company typically accounts for only10-20% of total inventory items.

B-items are the interclass items, with a medium consumption value; those15-25% of annual consumption value typically accounts for30% of total inventory items.

C-items are, on the contrary, items with the lowest consumption value; the lower5% of the annual consumption value typically accounts for50% of total inventory items.

The annual consumption value is calculated with the formula:

(Annual demand) x (item cost per unit)

Through this categorization, the supply manager can identify inventory hot spots, and separate them from the rest of the items, especially those that are numerous but not that profitable.

Steps for the classification of items:

1.     Find out the unit cost and and the usage of each material over a given period;

2.     Multiply the unit cost by the estimated annual usage to obtain the net value;

3.     List out all the items and arrange them in the descending value(Annual Value);

Percentage of items

Percentage value of annual usage

Class A items

About20%

About80%

Close day to day control

Class B items

About30%

About15%

Regular review

Class C items

About50%

About5%

Infrequent review