Page 19 - DMGT525_MATERIALS_MANAGEMENT

Materials Management Neha Tikoo, Lovely Professional University

Notes Unit 2: ABC Analysis

CONTENTS
Objectives
Introduction

2.1 Meaning of ABC Analysis
2.2 Objective/Purpose of ABC Analysis
2.3 Advantages of ABC Analysis

2.4 Limitations of ABC Analysis
2.5 Simple Numerical of ABC Analysis
2.6 Summary
2.7 Keywords
2.8 Review Questions

2.9 Further Readings

Objectives

After studying this unit, you will be able to:

 Explain the Meaning of ABC Analysis
 Discuss the Objective of ABC Analysis
 Explain the Advantages of ABC Analysis
 Discuss the Limitations of ABC Analysis
 Discuss the Numerical of ABC Analysis

Introduction

In the previous unit, we dealt with the meaning and scope of materials management. The unit
also discussed about the materials management in other areas of management. This unit will
help you to understand the concept of ABC Analysis. The various section and sub section of this
unit will also summarize the objectives and limitations of ABC analysis. Activity Based Costing,
or ABC, is a method of allocating overhead and direct expenses related to the most important
activities of the company first. This process allows business owners and managers an opportunity
to better define the areas of manufacturing or sales that generate the most profit for the company.
Inventory analyzed under the ABC method is classified in order of profitability to the company.
Class A inventory accounts for 80 percent of revenue, class B inventory for 15 percent of revenue
and class C inventory for 5 percent of revenue.
ABC analysis is a technique for ordering causes or problems from the most to the least significant.
In this way, the most significant aspects are identified (what Juran calls ‘the vital few’) and the
efforts can be concentrated on those, thus getting the maximum benefit with the least effort. The
analysis makes use of the ABC diagram, which is a special case of the bar chart, and is used in
conjunction with brainstorming, cause and effect analysis and cumulative line charts. The diagram
displays, in decreasing order, the relative contribution of each cause (for problem) to the total.

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