Provide an example of ABC classification in a business you are familiar with. What would be the A inventory items versus B and C? What ordering policies would you use for each of these?

Read below: ABC INVENTORY CLASSIFICATION, All items in the supply chain are not of equal importance. Some are very important, such as specialized surgical equipment. Others are less important, such as latex gloves in a hospital. The first step in managing inventory is to classify inventory based on its degree of importance in order to manage it properly. The tool for this is ABC classification. Classifying inventory based on degree of importance allows us to give priority to important inventory items and manage those with care. It also prevents us from wasting precious resources on managing items that are of less importance. ABC classification is based on Pareto’s Law, which states that a small percentage of items account for a large percentage of value. This value can be sales, profits, or other measure of importance. Roughly 10% to 20% of inventory items account for 70% to 80% of inventory value. These highly valuable items are classified as inventory items. Moderate value items account for approximately 30% of inventory items and contribute to roughly 35% of the total. They are called B items. Finally, approximately 50% of the items only contribute to roughly 10 percent of total inventory value. These are called C items and are of least importance.

Conducting an ABC classification of inventory is quite easy. The steps are as follows: 1. Determine annual usage or sales for each item. 2. Determine the percentage of the total usage or sales by item. 3. Rank the items from highest to lowest percentage. 4. Classify the items into groups. After ranking the items from highest to lowest percentage, do not force groups to fit the preset percentages, as these are rough estimates. Rather, there are typically natural breaking points that will occur. The data will naturally group itself and these are groupings that should be used. ABC analysis is extremely important for determining order policies. The most sophisticated inventory systems should be used for items. In fact, many managers personally oversee these. By contrast, C items are typically left for automated ordering systems as they do not warrant the cost of managerial involvement. ABC analysis is also important in establishing safety stock levels. Remember that safety stock is extra inventory held to guard against uncertainty of demand and prevent stock-outs. All inventory items are not of equal importance and the safety stock policy will be different based on ABC classification. The importance of not running out of stock of a particular item will enter the safety stock computation through the service level component, k.