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ABC Inventory

ABC inventory is a method of categorizing inventory to segment items into different inventory management processes. Typically, the segmentation is done by calculating out the annual usage of the parts, and labeling the top 70% of parts (by cost) as ‘A’ parts,  the next 25% as ‘B’ parts, and the final 5% as ‘C’ parts. On occasion, an organization may include all parts without usage over the last year as another category (i.e. ‘D’ parts). 

The power of this categorization lies in the Pareto Principle. Typically, around 15-20% of your parts will fall into the ‘A’ category. Around 30% will be in group ‘B’ with the remaining items in group ‘C’. The bottom line is that the majority of your inventory cost is contained in a relatively small quantity of part numbers. That means that you can get big gains with relatively low effort.

The first thing to keep in mind that the percentages are not set in stone. You can set up the breakdown between the categories to meet your specific requirements. The key is to make a conscious decision to treat different groups of inventory differently. That’s because the cost-benefit curve becomes significantly steeper when you try to manage all of your item numbers in the same way.

Inventory Management, By Category

Category “A”

  • Work on first when migrating to kanban
  • Track usage data closely for setting levels
  • Work closely with vendors to get reliable, on-time delivery
  • Aggressively resolve quality issues

Category “B”

  • Work on second when migrating to kanban
  • Use iterative management (adjust as needed based on observation by users)

Category “C”

  • Migrate to kanban only if a clear need
  • Hardware and small components typically fall into this category
  • Consider central location with vendor managed inventory; pull as needed from line

Category “D” (Optional)

  • No usage over last 12 months
  • Eliminate to clear up space / simplify management

 

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