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Sem 5 Prep
← OperationsABC classification

Formulas for this chapter

Annual value

Annual value = annual demand (units) x unit cost

The first step of every ABC analysis. Compute it for every item before sorting.

annual demand
Units consumed or sold in a year
unit cost
Cost of one unit

Cumulative percentage of value

Cumulative % = (cumulative annual value / total annual value) x 100

After sorting descending. The cut points between A, B and C are read off this column.

cumulative annual value
Running total down the sorted list
total annual value
Sum across all items

Typical class shares

A: 10-20 % of items, 60-70 % of value B: the middle C: 50-60 % of items, 10-15 % of value

As a guide when cutting the sorted list. Follow the bend in the Pareto curve and state the percentages you used.

% of items
Share of the number of line items
% of value
Share of total annual value
Step 2 of 18
The real wordsTheory

The A-B-C approach

A-B-C approachClassifying inventory according to some measure of importance, and allocating control efforts accordingly.

The measure of importance is annual value: annual demand multiplied by unit cost. Not unit cost alone, and not volume alone.

  • A items (very important): 10 to 20 % of the number of items, about 60 to 70 % of the annual value
  • B items (moderately important): the middle
  • C items (least important): 50 to 60 % of the items but only about 10 to 15 % of the annual value
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