ABC is a method used in inventory management and cost classification to categorize inventory or cost items into three categories—A, B, and C—based on their importance, typically measured by value, frequency, or impact. When applied to carrying costs, ABC classification can help prioritize which items require stricter control or more frequent review.
ABC Classification for Carrying Cost
| Category | Description | % of Items | % of Carrying Cost | Action |
|---|---|---|---|---|
| A items | High carrying cost items | ~10-20% | ~70-80% | Tight control, frequent review, accurate forecasting |
| B items | Moderate carrying cost items | ~20-30% | ~15-25% | Moderate control, periodic review |
| C items | Low carrying cost items | ~50-70% | ~5-10% | Simple controls, larger inventory buffer |
Example Criteria for Classification
- Carrying Cost per Unit: How expensive it is to hold the item in inventory.
- Inventory Turnover: Higher turnover may reduce carrying cost significance.
- Total Annual Carrying Cost: Units × Carrying cost per unit.
Steps to Perform ABC Classification Based on Carrying Cost
- List all inventory items with:
- Annual usage
- Carrying cost per unit
- Calculate total annual carrying cost for each item:
Total Carrying Cost=Annual Usage ×Carrying Cost per Unit\text{Total Carrying Cost} = \text {Annual Usage} \times \text{Carrying Cost per Unit}
- Sort items in descending order based on total carrying cost.
- Calculate cumulative percentages of carrying cost and number of items.
- Classify items:
- Top ~70–80% of total carrying cost → A items
- Next ~15–25% → B items
- Remaining ~5–10% → C items