Operations Management: Processes and Supply Chains, 12th Edition

ABC Analysis

Thousands of items, often referred to as stock-keeping units, are held in inventory by a typical organization, but only a small percentage of them deserve management’s closest attention and tightest control. A stock-keeping unit (SKU) is an individual item or product that has an identifying code and is held in inventory somewhere along the supply chain. ABC analysis is the process of dividing SKUs into three classes according to their dollar usage so that managers can focus on items that have the highest dollar value. This method is the equivalent of creating a Pareto chart except that it is applied to inventory rather than to process errors. As Figure 9.4 shows, class A items typically represent only about 20 percent of the SKUs ...