Page 268 - DMGT501_OPERATIONS_MANAGEMENT

Operations Management Sukhpreet Kaur, Lovely Professional University

Notes Unit 12: Service Level Method of Determining
Q – ABC Classification

CONTENTS
Objectives
Introduction
12.1 ABC Classification and Analysis

12.2 Other Classification Systems

12.3 Summary
12.4 Keywords
12.5 Self Assessment
12.6 Review Questions
12.7 Further Readings

Objectives

After studying this unit, you will be able to:
Describe various service level methods of determining quality
Discuss the concept of ABC classification and analysis

Explain the types of classification for the monitoring of the inventory
Introduction

ABC classification (ABC ranking) A method of ranking items held in inventory enabling
particular attention to be given to those that, if incorrectly managed, will be most damaging to
the effectiveness or the efficiency of an operation. Items are categorized according to their value

of usage, i.e., their individual value multiplied by their usage rate. It is a classification based on

Rupee usage of the inventory. The high value items, i.e., the first 20% are classified as ‘A’, the next

30% are classified as ‘B’ and the last 50% are classified as ‘C’ category items.

12.1 ABC Classification and Analysis
Vilfredo Pareto postulated the 80-20 rule; surprisingly, inventory also seems to follow that rule.
In other words, typically only 20 percent of all the items account for 80 per cent of the total rupee
usage, while the remaining 80 percent of the items typically account for remaining 20 percent of
the rupee value. This truth leads to the ABC classification.

The ABC classification is based on focusing efforts where the payoff is highest; i.e., high-value,

high-usage items must be tracked carefully and continuously. As these items constitute only 20
percent, the ABC analysis makes the task relatively easier.
After calculating the rupee usage for each inventory item, the items are ranked by rupee usage,

from highest to lowest. The first 20 percent of the items are assigned to class ‘A’. These are the
items that warrant closest control and monitoring through a perpetual inventory system.
One of the major costs of inventory is annual carrying costs, and your money is invested largely
in class ‘A’. Tight control, sound operating doctrine, and attention to security on these items
would allow you to control a large rupee volume with a reasonable amount of time and effort.

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