Background: ABC Class Update
Use the ABC Class Update (HAA) program to define the criteria for ABC classes, assign classes (A through J) to items based on these criteria, optionally update the cycle count frequency by ABC class, and print a report that lists all items by ABC class. See Road Map for work flow.
This topic has these subtopics:
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Classes
You do not have to use ABC classes. However, they can provide you with a means of concentrating on those inventory items that represent the largest cost, usage, or quantity on hand. For example, you can base the selection of items for physical inventory processing on ABC classes, with A representing the most important items, B representing lesser items, and so on.
You can use this program to assigned ABC classes to all inventory items. Alternatively, you can assign items to classes manually with the Branch Item Maintenance (IMB) program.
You can run ABC Class Update as often as you like. You do not have to use in conjunction with physical inventory processing.
You can use up to ten classes, from A through J. You do not have to use all ten classes. You specify a percent range for each class that you use (for example, A = 70%, B = 90%, C = 100%). The upper percent of the final class must be 100%. In this example, the program assigns items that rank in the top 70% of your entire inventory items to class A; if the final class is 90 to 100%, the lowest 10% are assigned to that class. You are ranking based on your selected value criteria (see Methods of Assigning Classes). If you select A = 70% it is typical for less than 30% of the items to be marked with an ABC class of A. The goal is to be able to focus your physical counting efforts on a lower number of items that have a high value impact.
Methods of Assigning Classes
You can specify one of these methods of assigning items to classes:
Method |
The program |
Unit cost |
Uses the item's standard cost as the basis for the ABC class breaks you specify. The higher the standard unit cost of an item, the higher its class. You may want to run the Standard Cost Rollup (MCR) program to update the standard unit cost before you use this method. |
Usage |
Multiplies the item's standard unit cost by its actual usage taken from sales and manufacturing history. You must enter the number of months of history, in addition to the current month, to use in the computation. Items with a high standard unit cost or frequent usage are assigned to higher classes. However, items with a high standard unit cost and low usage or items with frequent usage and low standard unit cost may be assigned to the same class. |
Quantity on-hand |
Multiplies the item's standard cost by its current on-hand inventory, which the Inventory Status Inquiry (ISQ) program displays. This method considers the importance of inventory control based on current quantities. |
The program totals the costs of all inventory items based on the method you select. It assigns each item to the class that corresponds to its percent ranking within the unit cost, usage, or quantity on-hand values.
The program starts with the item that has the highest cost or value and assigns ABC class A to that item. It assigns class A to each subsequent item, until an accumulation of their cost or value reaches class A's designated percent of the total cost or value of all items. Then it assigns class B to items until their accumulated cost values reaches B's percent of the total cost or value; then class C and so on until the program has assigned all inventory items up to the last class used.
Cycle Count Frequency
You have the option of updating the cycle count frequency for each class. When you select this option, the program updates the Count freq field in the Branch Item Maintenance (IMB) program. Subsequently, you can select items due to be counted based on the Count freq field with the Cycle Count Preparation (HCP) program.
Practical Use
The ABC classification or analysis technique is well documented in the American Production and Inventory Control (APICS) literature. Most articles recommend that you use only three classes with percentages that range around 10%, 20% and 70%. These percentages can vary from company to company. The main guideline is that there should be fewer class A items.
The goal of the ABC classification is to rank items on a method to determine how much attention those items should get; the higher the class, the more attention an item should get. Although this technique has been prescribed for cycle counting, you can and should use it to prioritize items in other areas of your company; for example, for purchasing, bill of material accuracy, and customer service levels.
This technique depends on the ease of its use to be effective. However even a simple technique can fail if the ground rules change too often. For this reason, you should not re-classify more than twice a year.
Cost values alone are never a precise evaluation of the importance of an item. Some companies bring in other factors to the equation to try to have a classification that accurately depicts the importance of items. For example, you could grade finished goods items on sales volumes multiplied by the selling price or by the unit gross margin; you might upgrade class C items that are purchased made to order to a class B.
ABC Class Update Report
The program first applies the method and criteria you select. Then it prints a report that shows the items in each ABC class.
The report includes this information for items whose ABC class changed based on the criteria you entered:
Item number
Item description
ABC class
Standard unit cost
Costed value:
If you selected C Cost for the method, costed value is: Standard unit cost
If you selected U Usage for the method, the quantity used is printed; costed value is calculated: Unit cost x Quantity used
If you selected Q Quantity for the method, the on hand quantity is printed; costed value is calculated: Unit cost x Quantity on hand
Cycle count frequency if you selected the Update cycle count freq by ABC class? Program option
The total costed value for each class and the number of items assigned