ABC Analysis for Inventory Control
Each quarter or so, an ABC analysis of the materials in the inventory has to be done (the exact interval may differ from industry to industry).
ABC analysis is based on the 80/20 rule or Pareto Principle
Category A items are just 15% of all inventory on a volume basis, but make up 75-80% of inventory on a cost basis.
Category B are 30- 35% on a volume basis, and about 15-20% on a cost basis.
Category C are about 50% of inventory on a volume basis and just about 5-10% on a cost basis.
You need to be most careful for the proper flow of Category A materials as the losses here would be huge. Whereas the B and C items must be analyzed for their influence on a continuous flow, as they might be vital sometimes and if they're not managed properly they can effectively stop the working of the entire assembly line or plant.
ABC analysis helps to control cost. Further exercising with it helps to achieve cost savings and gives a competitive edge in inventory turn over ratio.