A brief rant about the ABC's


Apparently the folks writing about stratifying inventory into A, B and C items and building calculations of such into ERP packages didn’t get the lean memo.

Wikipedia is typical of such thinkers when they describe the ABC thought process as:

‘A’ items – 20% of the items accounts for 70% of the annual consumption value of the items.

‘B’ items - 30% of the items accounts for 25% of the annual consumption value of the items.

‘C’ items - 50% of the items accounts for 5% of the annual consumption value of the items.

The idea of micromanaging some items and slacking off on others based on purchase price is the very same theory they taught me at the University of Cincinnati back in the days when … well, back in the days a long, long, long time ago.

If the goal is to become leaner – just in time, one piece flow and so forth – there is a lot more to it than purchase price. Traditional ABC thinking is the sort of thing only an accountant can love – that purchase price is the alpha and the omega of materials and inventory management. By this logic the best way to manage a troublesome A item is to source it in Vietnam for a fraction of the price, buy it by the container load and fill a warehouse with it, then forget about it; it’s now a C item – problem solved.

In fact, ABC analysis (A-C analysis as far as I am concerned. I never did understand the ‘B’s’ - if they are important call them A’s; if they aren’t call them C’s. B’s always struck me as a classification for people who don’t really don’t know what to do with some items) should be based on Total Cost of Ownership. Long lead time makes items A’s, as does dubious quality control at the supplier’s plant.

Traditional ABC logic is really akin to the sort of thinking that leads to JIT by simply shoving inventory back on suppliers, or thinking the company has somehow become leaner by negotiating consignment terms with some someone. In fact, it’s not about the dollars – the inventory value. It’s about flow.

A items are those that represent the biggest inhibitors to flow – one piece flow to be precise. They are the ones that must be micromanaged and handled with a great deal of focus – regardless of the purchase price. The expensive item may not deserve much time and attention if it comes from a great supplier down the street with short lead times and impeccable quality. At the same time, the part to be most worried about may well be that cheap connector you buy from that guy in Thailand who has no structured quality control process. Price is only the driver of inventory management if you still think old school accounting is still relevant. A lean thinker sees it as simply one input to the equation – and often a minor one.

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