ABC Analysis and 80/20 Rule

The ABC analysis is a system for the inventory control that allows to classify any type of product, good or raw material in any of three different categories, each of which will be subject to a different management control. Thus:

A: critical importance.
B: medium importance.
C: less importance.

Once the products have been grouped together, each category will be managed differently, with more attention and resources being devoted to articles in category A, less those in group B, and even fewer in group C.

The called “80/20” rule, can be used in conjunction with the ABC analysis for inventory management. Under this rule, 80 percent of the value of the inventory is concentrated in approximately 20 percent of the products. Applying this principle: Group A would represent 80% of the value in 20% of the items and categories B and C would represent 20% of the value in 80% of the items.

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In my opinion and according to my experience, the ABC analysis helps to optimize the inventory:

-Reduce the necessary working capital.
-Improves the allocation of resources.
-Allows identify which items should be put in stock and when, so that the customers’ demands can be satisfied and maintain a healthy balance.
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