ABC Inventory is a lean tool for managing inventory in a more productive and economical manner, by organising inventory into three categories (A, B and C). This allows you to differentiate between high and low value items, and be able to apply more/less controls on part of the inventory instead of across all.
The principle behind ABC Inventory is a bit similar to the 20/80 from Pareto that is used in the Pareto Chart. It is based on managing a vital few (20%) items will control most (80%) of the situation.
ABC Inventory Groups
In order to use ABC Inventory all materials have to be split up in three groups
- Group A: Approx. 10% of the items that count for 50% of the total value.
- Group B: Approx. 20% of the items that count for 30% of the total value.
- Group C: Approx. 70% of the items that count for 20% of the total value.
ABC Inventory – Define Value
In order to distinguish the vital few, we need to define value of inventory items and how we measure it. Most companies measure them in pounds and pennies.
Unit Quantity x Unit Cost = Inventory Value for Unit
In addition we also want to measure the movement of the inventory which is also called inventory turnover. This is defined as the cost of goods sold divided by the average value of inventory. E.g. your cost of sales is £2.000.000 with an average inventory value of £200.000, the inventory turnover is 10.
Advantages of ABC Inventory
- It ensures more focus on and better control of the costly items.
- It is a more data driven method of controlling stock and reducing it to optimal levels.
- Guarantees reduction in storage expenses.
If you are interested in lean and how to make your organisation more efficient, then our 5S Training might be interesting for you. 5S is usually one of the first elements implemented when starting out with lean, as it gives a great foundation for further improvements.
Alternatively you can continue to our Quality Training page to see some of the other trainings we offer.Go to Quality Training