Inventory analysis: the ABC technique.

INVENTORY ANALYSIS: THE ABC TECHNIQUE Inventory represents an enormous investment for many companies, and the management of inventory represents an opportunity for considerable cost savings depending on the tools used and the expertise applied. Whether you're a retailer, a manufacturer, or a service organization, inventory is one of the most difficult business assets to manage, control, and protect.

Restaurateurs closely watch the shelf life of expensive food items since they lose money if the seafood spoils or the fruit rots. Manufacturers perform a balancing act--trying to conserve cash by keeping inventory levels low without choking off production lines by running out of an item with a six-month delivery time. And many organizations stock items that, while not expensive, perishable, or difficult to acquire quickly, must be protected from theft. Pharmaceuticals stocked by drugstores, hospitals, and clinics fall into this category.

Predictably, businesses have developed a variety of tools to manage what is often their largest liquid asset. One of the most popular inventory management and control tools is called ABC Analysis and Classification. Essentially, the ABC system is a process of grouping inventory items into three classes--each governed by a different set of management and control procedures. Since ABC Analysis is really more a process or set of procedures than a quantitative model, we'll review the process briefly before stepping into the mechanics of automating it with 1-2-3 or Symphony.

THE ABCs OF ABC

ABC Analysis and Classification is a common-sense approach to breaking down a firm's inventory items into classes A, B, or C to show their relative value to the business, where A is most valuable and C is least valuable. After categorizing items in the three classes, …