АВС classification of the stock items

Sartbayeva Yerkezhan

Resident of General Surgery in Kazakh-Russian medical university

АВС method of Pareto (law 80:20), as practice shows, isn’t applied in stock management at all, or is used in the traditional form, which underwent material changes in the last 10-15 years in the practice of foreign enterprises.

The realization of АВС-classification includes several stages.

1. The choice of classification criterion.

2. Calculation of the progressive total value of the criterion of classification.

3. Allocation of classification groups.

The first stage is the only unformalized step of classification. The choice of classification criterion depends primarily on the company's strategy, practiced at this stage of development. For each of the functional units of the enterprises the operational strategy may be associated with the implementation of the specific for this unit field of work. The choice of ABC-classification in such way requires the joint discussion of this question by logistics service with upper executive manager and with the managers of the department, connected with each other by logistics chain of the material flow. Will the company use one or more classification criteria is a task related to the implementation of a given company’s strategy [1].

Lack of attention to this classification stage would bring to naught all the efforts of using this tool in the practice of organization management as a whole. The criteria for classification can be purchase price, sales profit, profit share, sales revenue, the proportion of turnover, return on sales, the average inventory level in different units, the share lay in stocks, the period (speed) of inventory turnover and so on. Making a second step of the ABC classification includes the calculation of progressive total of the criterion for the classification of commodity item. The ratio of the value of classification criterion is calculated as the ratio of the criterion of each item to the total sum of the criteria for classifying the second column [2].

Ratio value for the first nomenclature position corresponds to the column of the cumulative sum. For the following nomenclature items the summation with respect the value of progressive total is extended with the value of the ratio in the current position. The third step - the selection of classification groups in the classic ABC-method - is based on the Pareto Law, which states that 80% of the values of the qualitative criterion are determined by 20% of the amount of the selected objects set.

ABC classification method has undergone significant changes in recent decades due to the explosive development of business and the economic and mathematical research. These changes affected all stages of the ABC method. The peculiarity of the ABC-classification on the first stage is that the modern business situation cannot be described by a single criterion. It often requires the use from two to four criteria. We can use one of these three offers.

а) With a very wide range of nomenclature good result provides a mechanism for consistent use of criteria. Initially, the classification is performed according to the most significant criteria. Then for group A the classification is made according to the second criteria, etc

b) Probably the ABC-classification exercise for each of the criterion (in parallel), and then using the method of paired comparison determine the a set of stock items within the group A, АВ, ВС and С in each of the exercised classifications. Parallel classification is more time-taking and it doesn’t allow narrowing significantly the number of allocated groups, but gives the comprehensive information about the peculiarities of each nomenclature groups.

c) The third approach is to form a synthetic classification criterion. The ratio, which corresponds to the importance of these criteria in the realization of the company’s strategies, is determined for each of the chosen criterion. The summing-up of the come out value at the evaluation of synthetic criterion doesn’t have economic sense, but gives the opportunity to characterize each stock item by one number, which is included into the classification, and to carry out ABC classification according to classical scheme with the use of one criterion of classification. The second stage of ABC classification is clearly formalized. It may be noted that due to the multiplicity of using criteria of classification, sometimes the problem of ABC table sorting becomes. Selecting the direction of classification (in ascending and descending order) is determined by the economic content of the classification criteria. Criterion of turnover rate or days sales in inventory may demand the grading in ascending order of the criterion value, as group A according to acknowledged logics must include positions, which have maximum frequency of applications for the customer service. There are some other approaches [3].

The third stage of ABC classification in the classical approach is based on the hypothesis, that Pareto law is applied in the business sphere, and particularly, in the statistics of stock turnover. Practical activity of foreign enterprises and analysis of the statistics of the domestic enterprises shows that it is not the case. Pareto law is not an objective correlation of qualitative characteristics and stock items. Consequently the popular rate 80:20 cannot be used automatically at the using of ABC classification in the stock management. There are good reasons to use expert or empirical approach in determining of group boundaries, in which the recommended values of qualitative boundaries in classification groups are determined by the specialists on the basis of the peculiarities of business sphere and nomenclature groups [4].

Thus the modern business makes to change classical example of using the ABC classification not only on boundaries of the groups but also raise a question about the quantity of groups of the classification at ABC approach. ABC method is attractive in its objectivity of product mix grouping to more or less important positions of stock items. Consequently in seeking to resolve this issue about the quantity and group boundaries we need to use not expert opinion but maximally formalized procedures. Quite popular instrument, described among other in the domestic publications, is the method of plotting of cumulative curves (the line of growing ratio). It consists of plotting a line chart of the correlation between qualitative and quantitative values on the basis of the ABC classification table. Then it is necessary to join by a line in extreme points of the curve and find a tangency point of parallel deduced straight line. This point will determine the nomenclature group, for which the character of the accumulation of qualitative criterion is homogeneous. This point will determine boundaries of group A.

Then it is necessary to repeat the procedure, by joining the initial and finite point of the left part of the curve and fix the boundaries of the next group by drawing a line, which is parallel to the resulting line in the tangency point with the curve. The offered algorithm allows defining automatically the boundaries and the quantities of groups, but doesn’t exclude the analysis of the resulting classification by the director or specialist for the purposes of making necessary adjustments. Nevertheless the accent to the maximum objectivity of the analytical procedure gives the guaranties of the effectiveness of the classification in future.

It is worthwhile to say that although the using of each of three recommended approaches to the group dropping and their boundaries in the ABC classification gives different results, but it doesn’t decrease the practical value each of the approaches in the determining of the prioritized stock items at the stock management.

List of used literature:

1. Kurivchak, I. Skol'ko mozhno zarabotat' v farme? / I. Kurivchak // Katrenstil'. Zhurnal dlya sotrudnikov aptechnykh uchrezhdeniy.– 2012.– № 3.– S. 16-20.

2. Levik, O. Sovremennyye aspekty upravleniya assortimentom / O. Levik // Yezhenedel'nik Apteka.– 2007.– № 31.– S. 92-95.

3. Lindblom, A. Taktika kategoriynogo menedzhmenta: analiz kontrolya proizvoditeley / A. Lindblom, R. Olkkonen // Upravleniye kanalami distributsii.– 2008.– № 3.– S. 242-253.

4. Marn, M. Tsenovoye preimushchestvo / M. Marn.- M .: Al'pina biznes buks, 2004.- 317 s.