Definition of Abc Classification Method
ABC classification method is used to classify business stocks in three categories i.e. A, B and C. Stocks classified in the A category are most important according to their value while stocks classified in the C category are least valuable. This classification method is most important to managers as it helps them to shift their focus on the most important products and hence adjust their inventory control policies. The value of business stocks is measured in a specified period e.g. on a quarterly or yearly basis. This method is built on the Pareto Principles for the better management of stocks that are important to the company.
- A-Items are products that are relatively small in number but they have a relatively high consumption value.
- B-items are those products that have lower consumption values than A items but high value than C items. These items need special focus as they can alter inventory control policies if goods drift closer to class A or C.
- C-items have the lowest consumption value. It has a high number of product lines but with relatively low consumption value. The value in danger of serious loss is comparatively low in this class.