Operations Management II

Report on ABC Classification

The underlying assumption in the analysis is that sales trend in different products is
constant throughout the time period given and the ABC Classification of products is done taking
into consideration the sales of all the 4 years together. The table below shows the summary of the
data:

TOTAL

Percentage of total products

24.06
25.56
50.38
100.00

Percentage of Sales
79.71
15.32
4.97
100.00

Class
A
B
C

As summarized in the figure, about 24% of the products contribute to 79% of the
revenue. They are the Class A items. These are the critical few products among the SKUs.
They require tight inventory control as they are the critical drivers to the sustainability of the
business. They should be checked continuously and their inventory records have to be accurate
and they should be prevented from any scenario of stock out. It should be ensured that adequate
resources are allocated towards managing these products effectively.
Another 25% of the products contribute to 15% of the revenue. They are Class B items.
These products require moderate inventory control. The inventory records need not be as
accurate as for Class A items but should be better than that for Class C items. This is because
over the years demand for these items may pick up and they may become Class A products.
The final 50 % of items contribute to a mere 4.97% of total revenue and these products
are referred as Class C items. These are the trivial many items. They do not require a
continuous review policy towards managing inventory. These items can be checked periodically
and maintaining inventory records for these is insignificant.