Classification Problem: ABC System
The first step in the inventory control process is classification of different types of inventories to determine the type and degree of control required for each. The, ABC system is a widely used classification technique to identify various items of inventory for purposes of inventory control. This technique is based on the assumption that a firm should not exercise the same degree of control on all items of inventory. It should rather keep a more rigorous control on items that are (i) the most costly and or (ii) the slowest-turning, while items that are less expensive should be given less control effort.
On the basis of ‘the cost involved the various inventory items are, according to this system, categorised into three classes: (i) A (ii) B and (iii) C. The items included in group A involve the largest investment. Therefore, inventory control should be the most rigorous and intensive and the most sophisticated inventory control techniques should be applied to these items. The C group consists of items of inventory which involve relatively small investments although the number of items is fairly large. These items deserve minimum: The B group stands midway. It deserves less attention than A but more than C. It can be controlled by employing less sophisticated techniques.
The task of inventory management is to properly classify all the inventory items into one of these three groups categories.