Explain ABC inventory management strategy.

ABC inventory management is a classification technique used to categorize items in inventory based on their relative importance and value to the organization. It is named after the first three letters of the alphabet, with each category representing a different level of significance. The ABC analysis helps organizations prioritize inventory management efforts, optimize inventory levels, and allocate resources effectively.

The ABC inventory management strategy classifies inventory items into three categories:

1. Category A (High-Value Items):

   • Category A items represent a relatively small portion of the total inventory but contribute a significant portion of the total inventory value.
   • These items are typically high-cost, high-demand, or critical for production or customer fulfillment.
   • Examples of Category A items include high-value raw materials, finished goods with high profit margins, or products with high sales volume.
   • Due to their importance, Category A items require close monitoring, rigorous control, and strategic management to minimize stockouts, avoid excess inventory, and optimize working capital.

2. Category B (Medium-Value Items):

   • Category B items have moderate importance and value compared to Category A items.
   • These items represent a moderate portion of the total inventory value and may have moderate demand or cost.
   • Examples of Category B items include components, sub-assemblies, or finished goods with moderate sales volume or profitability.
   • Category B items require a moderate level of attention and management to ensure adequate inventory levels, prevent stockouts, and optimize inventory turnover.

3. Category C (Low-Value Items):

   • Category C items represent a large portion of the total inventory but contribute a relatively small portion of the total inventory value.
   • These items are typically low-cost, low-demand, or non-critical for production or customer fulfillment.
   • Examples of Category C items include low-value consumables, spare parts, or products with low sales volume or profitability.
   • While Category C items may not require intensive management, they still need regular monitoring and control to prevent excess inventory, minimize carrying costs, and ensure availability when needed.

By classifying inventory items into these categories, organizations can prioritize resources and efforts based on the relative importance and value of each item. This allows for more effective inventory management, improved decision-making, and better alignment with overall business objectives. Additionally, ABC analysis helps organizations identify opportunities for cost savings, working capital optimization, and operational efficiency improvements across the supply chain.