How to Use the ABC Inventory System

In business there is something known as the 80-20 rule. This rule can be applied to many elements of your business, including sales performance, employee productivity, and inventory. In short, the 80-20 rule states 80% of your sales will come from just 20% of your inventory items. When developing a model by which to track and monitor inventory, this must be taken into account.

Setting up the ABC Inventory System

With an ABC inventory system all physical inventory is broken down into one of three groups. The fastest moving items, the 20%, will be classified as ‘A’ items and will receive the highest level of attention. Items which are considered obsolete or near obsolescence will be classified as ‘C’ items. All other items will be classified as ‘B’ items.

In certain situations companies add a fourth category known as ‘D.’ This will be where all obsolete inventory is classified. Unless a company has a major problem with obsolescence this is generally not necessary.


Inventory Criteria for ABC System

All companies wish to monitor inventory in different manners for a variety of reasons. Inventory items which are extremely expensive or which have long lead times may be moved into a higher classification. Inventory with expiration or spoil dates may also be classified differently. The key is to be flexible and allow your inventory system to work for you and to meet your needs. cek harga ekspedisi

Inventory movement fluctuates and this must be taken into account. Elements such as seasonality, new items, or price reductions can all have a major effect on inventory movement. For this reason the inventory classification must be reviewed periodically to insure all items remain properly categorized. The volatility of your specific inventory will determine how often this review should take place. At a minimum, all inventory classification should be reviewed on an annual basis.

Inventory Counts and Cycle Counts

A great many companies no longer conduct annual inventories. An annual inventory is a snapshot of your inventory which quickly becomes out-dated. Instead they are conducting cycle counts. A cycle counting system counts a certain percentage or number of items daily or weekly. ‘A’ inventory is counted more frequently than ‘B’ inventory and all ‘C’ inventory is counted with even less frequency.

The goal of cycle counting is to identify problems or inventory variances as quickly as possible. In order to correct errors it is important to investigate and find the root cause for the error. Only by finding the cause of the error can you implement the proper controls or corrective measures to prevent similar errors in the future.

Identifying and correcting inventory variances quickly helps insure a more accurate inventory record. This is critical to areas such as purchasing, manufacturing, and sales. Incorrect inventory levels can result in lost sales, lost revenue and poor customer relations. Proper classification and tracking of inventory is critical to maintaining a smooth flow of products to your customers and income to your bottom line.


Related Post