ABC Analysis:

ABC that is Always Better Control analysis is an application of the principle of 'Management by Exception' to the field of inventory control. If we seem at the inventory mix of a firm, this would constitute of hundreds of items. Mainly of these items would be cheap and the frequency of their utilization would be less. The left items would be costly, more frequently employed and account for huge proportion of firm's investment in inventories.

This would be a costly and cumbersome act to adopt a general policy and determination of economic order quantity and reorder point for management of each that item of inventory. In such technique all the items of inventory are categorized in three categories that are: A, B and C depends on the usage rate, rupee value and criticality of the item.

• A category items are such inventory items that have maximum usage rate and constitute 70 to 80 percent of inventory value, although only 5 to 10 percent of the inventory volume. These types of inventories need strict control and frequent monitoring.
• B category items are those inventory items that have moderate value and usage rate and constitute 20 to 25 percent of inventory value, although only 20 to 30 percent of the inventory volume. These kinds of inventories need less control and monitoring.
• C category items are of low or usage rate and negligible value. The left items of inventory representing 5 to 10 percent of inventory value, although 60 to 70 percent of the total quantity of inventory fall in this sort and require common control.