ABC inventory method: What is it and what are its benefits

The ABC method is the frequent classification used in the management of a certain inventory, which starts from the result of the Pareto principle. This analysis can identify items that significantly impact overall inventory value, cost and sales, allowing the creation of product categories that need different modalities.

It is very useful and has the ability to streamline various processes storage of goods in companies, whether small or large. Is a favorable inventory analysis tool for employees belonging to the logistics and transportation department, who are in charge of organize and manage the warehouse, where you can specify the unequal relationship that exists between inputs and Departures.

What is the ABC method?

Companies often resort to the ABC method derived from Pareto's Law, to

take decisions with respect to the degree of control that is generated in the different types of products. This law is applied in many economic situations, since it is observed that fewer elements belonging to a set of about 20%, corresponds to most of the value of another set of about 80%.

In the event that 80% of a company's sales correspond to 20% of the products that it sells, the correspondence will not be exact, therefore, there is a disproportion that many times is generated in the distribution of a certain set that is in a group of elements.

This disproportion can also occur in inventories. This reality can be verified in many companies that apply this method, to decide the level of attention that should be paid to the various products.

Methodology of the ABC method

The methodology of this type of analysis is based on the management that is provided to the indirect production costs that are not easy to identify as a benefit to the company.

Many of these indirect costs are usually fixed to short termTherefore, this method assumes a long-term perspective and recognizes that at a certain moment they can be modified for decision-making.

This activity is also known as a transaction, the cost drivers are the measures of the number of transactions that are involved in some particular activity.

Products that are low volume can cause higher transactions per unit of production than those that are high volume. Likewise, any manufacturing process that is highly complex contains more transactions than the simplest processes.

This means that, if the costs are generated by the number of transactions, the allocations based on volume will allow higher costs for high-volume products and lower costs for those with little complexity.

Formerly the cost centers For the most part, the only measurement factor used to channel costs to products was through related factors with the working hours of machines and people, as they could favorably reflect the causes of costs in their given environment.

The costs of this method can be used in the allocation of units and at the same time in other bases for Try to achieve a production that is much higher in terms of the precision of the costs of the products.

Classification of the ABC method for inventories

With this method, the presence of inventory can be divided into three types of classes, which will be detailed below:

A class

These can be located in the products of maximum importance, therefore, they are given more attention than the other areas. These generally present 80% of the company's annual consumption valuation and 15% of all units in inventory.

Class B

In this case we speak of the second article of average consumption. Here are the products that usually represent 15% of the value of annual consumption and also constitute 30% or 40% of all inventory items. Although they are not as well cared for in the way that class A ones are cared for, their existence and costs are constantly controlled.

Class C

Minor products are found in this area, so there is very little supervision. These represent 15% of the total consumption valuation and 40% or 50% of the valuation of the articles that are in the warehouse.

Advantages of the ABC method

Among the most important advantages of this method are:

·It ranks various product costs and corrects the previous benefits of low-volume product attributes.

·The analysis of the benefits predicts new perspectives related to the behavior of costs.

·The utility and credibility of cost information is increased in decision-making.

·Implement total quality.

·Eliminate activities that have no product value.

·Use the value chain, as a competition tool.

Disadvantages of the ABC method

Among the disadvantages of this method are:

·It is not easy to select the activities that are reflected in the behavior of costs.

·Its implantation is usually expensive.

·Generally does not clearly distinguish the cause of a certain activity.

Steps to use the ABC method

The ABC method differentiates products that require a high level of attention with regard to control and time. In order to use this useful method, it is necessary to follow the following steps in an orderly fashion:

·Place the products in a classification from highest to lowest.

·Perform the calculation of the percentage that each of the articles has, on the totality of articles in general and in turn on the total of what has been invested.

·Get the stored items and investment percentages.

·Create class groups A, B and C.

·Finally, it must be represented graphically, placing the stored percentages of the items on the abscissa axis (X) and the stored percentage of investment on the axis of coordinates (Y).