The ABC inventory system
/What is an ABC Inventory System?
An ABC inventory system classifies all inventory items into three categories. All inventory items in the “A” classification are the most heavily used, and so must be closely monitored to ensure that inventory accuracy levels are quite high. Otherwise, a business would put itself at risk of having a production shutdown or stockout condition for customers. All inventory items in the “C” classification are rarely used and usually have a low unit cost. It is much less important for “C” items to have perfectly accurate inventory records, so inventory audits for these items are conducted at much longer intervals. All remaining inventory items are considered to have average usage levels, and so are examined at intervals that fall between the “A” and “C” items. An ABC inventory system will result in about 5% of inventory items being classified as “A” items, 15% as “B” items, and the remaining 80% as “C” items.
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Advantages of the ABC Inventory System
The main reason for using the ABC system is to focus the cycle counting efforts of the warehouse staff on the most important inventory items, rather than spreading their efforts uniformly across all inventory items. This is a more efficient way to expend employee labor in order to attain a reasonable level of inventory accuracy. The system is also useful for purchasing purposes, since items in the “A” designation can be tracked more closely to ensure that they are never out of stock. A third advantage is that an intensive analysis of “A” classification inventory items reduces the risk that these items will go out of stock due to a mis-count, which improves on-time deliveries.
Disadvantages of the ABC Inventory System
A potential concern with this system is that inventory usage levels may vary over time, requiring adjustments to the assigned categories on a periodic basis. This may call for ongoing analysis efforts to reassign inventory items to different classifications, which can consume a fair amount of staff time.