Inventory have a significant impact on overall inventory cost.

Inventory is a major current asset for any
organization since its associate with many different costs. Therefore managing
inventory is essential which is why the concept of inventory management has
evolved. There are different inventory control techniques deployed
by organizations along with their inventory holding costs and
potential profits that comes under the concept of inventory management such as
ABC analysis, EOQ model, VED analysis, SDE analysis etc.

Among these concepts ABC analysis is the one in
action the most. ABC analysis is focusing on identifying items that will have a
significant impact on overall inventory cost. Organizations have various
inventory items. But all these items are not equally important since they have
different values.  That is why firms use
ABC analysis to identify what are the most critical items according to their

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ABC analysis divides an inventory into
three categories.

A – Items with high value
that needs tight control. (70-80% from total value & 20% from total items)

B – Items that having a moderate value that needs less control
than A items but greater control than C items. (15-20% from total value &
20-30% from total item)

C – Items with low value that need lesser control than both A
& B items. (5% from total value, almost negligible & 40-50% from total
no of items)

These different categories of
stocks will require different management and controls such as,

Tight controls for A
items & maintaining high accurate records, optimal order processing &
follow up mechanisms

Moderate controls
for B items & maintaining good records with close attention.

Lesser controls for
C type of items & maintaining simplest records.

This ABC concept is very much important because it assist
organizations in recognizing “where the value is”. By focusing on inventory
items compared to its values, a company can assign proper resources to attain
the optimum inventory levels, reducing inventory costs, ensuring customers’
needs are met & gain competitive advantage over the competitors in their