ABC inventory classification is an important part of your supply chain. The Finance department also considers classifying inventory to be essential as it has a significant impact on the organisation’s business continuity. It is essential in setting procurement policies, and applying check and balance where relevant. ABC classification help segment all products and attention is given to the items with the highest financial risks. There are various factors that are taken into consideration when reviewing or implementing a new ABC inventory classification.
The value of an item per unit cost,
Current historical consumption quantity of a given period.
Forecasted quantity by volume and value (given period).
Depending on an organisation, the ABC classification is predetermined by management and are confined to certain percentages, for example. A=30%, B=40%, and C=30%. Where A = highest value, B = medium value, and C = low value. Deciding which products fall within any of these categories will be determined by a number of historical and forecast analysis and also the product unit cost. A product unit cost of the highest value does not necessarily translate to class (A). There are also some critical factors to be taken into consideration like the financial threshold (less/greater) than a pre specified monetary value. Because demands are increasing volatile and products are constantly phased in and phased out (obsolesces/NPI). The general acceptable standard is to review ABC classification at least once a year.
Do you want set up ABC classification, or undertake a proper review of your current ABC classification with best ABC classification practices? We are here to help, just call on us today.