ABC inventory system is a method categorizing inventory items based on their significance. We classify items into three categories:
- Highest value items (A)
- Medium value items (B)
- Lowest value items (C)
Through this ranking, we can ensure that more attention must be given to the highest value items (group A). That way, operations can run effectively and efficiently.
Furthermore, ABC analysis involves the following stages:
- Separates items, both finished goods and raw materials, into several groups.
- Calculates the annual dollar value for each group. That could be the unit cost for raw material inventory and the dollar value of sales for finished goods.
- Assign ratings for each item. For example, for raw materials, group A covers items that spend 15% costs; group B, which consumes 30% costs; and group C for the remaining of 55%.
- Mark the inventory with the appropriate ABC classification and record it in the master inventory item record.