What is ABC analysis in inventory management?
In accounting, ABC stands for activity-based costing. In inventory or stock management, it’s a method of stock control. It’s basic assumption is that not all stock is equally valuable, therefore doesn’t need the same kind of attention. So you categorise all your stock according to its cost and quantity – and create a graph with cost shown on Y axis and quantity shown on X. From left to right, you place your stock from highest value to lowest. Typically, you see that a small portion of stock is the most valuable, and therefore needs maximum attention and resources – that’s called ‘A’. The next most valuable section of stock is B, the next is C and so on. Basically it shows you which stocks need more attention and which need less. It helps in utilising resources for stock management more effectively.
