The methods used to control inventory focus on
• Classification of inventory
• Setting up minimum stock levels and ordering according to that
• Using different ordering methods
ABC Analysis
In this method, all the inventories of the company are classified into three classifications, based on the annual amount involved in maintaining the item’s inventory. This amount is calculated by multiplying number of units consumed in a year with the price of a unit of the item.
The items are classified in three classes: A, B and C.
• Class A items are those which account for approximately 50-70% of the total inventory cost.
• Class B items are those which account for approximately 20-30% of the total inventory cost.
• Class C items are those which account for approximately 5-10% of the total inventory cost.
This means that we should have a greater degree of control to preserve Class A items. They need more accurate record keeping and forecasting.
A reasonable degree of care may be taken in order to control the items of Class B.
A routine type of care may be taken in the case of the third category, Class C.
ABC Analysis method is also known as “stock control according to value method”, “selective value approach” and “proportional parts value approach”. If this method is applied with care, it ensures considerable reduction in the storage expenses and it is also greatly helpful in preserving costlier items.
(Expert advice to GROW your business wherever you are, whenever you want.
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