ABC Inventory

ABC inventory is a method of grouping materials based on cost and usage to assign them different inventory management processes. Typically, the segmentation is done by calculating out the annual usage of the parts and labeling the top 70% of them (by total 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 part numbers will fall into the ‘A’ category (with 70% of the total cost). 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 is that the percentages are not set in stone. You can adjust the percentages you assign to each category to meet your specific requirements. The key is to make a conscious decision to treat the various groups of inventory differently.

Just make sure that you don’t put all of your materials into the most highly managed grouping. The cost-benefit curve becomes significantly steeper when you try to manage all your item numbers with the most time-intensive process.

ABC Inventory Management, By Category

Category “A”

• Work on first when migrating to kanban
• Track usage data closely to set inventory levels precisely
• 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 to restock the production line

Category “D” (Optional)

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