The ABC Inventory Matrix
The ABC inventory analysis can be expanded to assist in identifying
obsolete stocks and to analyze whether a company is stocking the
correct inventory by comparing two ABC analysis.
First, an ABC analysis is completed based on annual inventory
dollar usage (as shown in Example 7.1) to classify inventories into
A, B and C groups. Next, a second ABC analysis is performed based
on current or on-hand inventory dollar value (as shown in Example
7.2) to classify inventories again into A, B and C groups.
Finally, the two ABC analyses are combined to form an ABC
inventory matrix as shown in Figure 7.1.
The A items based on current inventory value should match the A
items based on annual inventory dollar usage, falling within the
unshaded diagonal region of the figure.
Similarly, the B and C items should match when comparing the two
ABC analyses. Otherwise, the company is stocking the wrong items.
The ABC inventory matrix also suggests that some overlaps are
expected between two borderline classifications (as indicated by the
wide diagonal region).
For instance, some marginal B items based on annual inventory
dollar usage might appear as C items based on the current inventory
value classification and vice versa.
Referring to Figure 7.1, plots in the upper-left shaded triangle og the ABC
inventory matrix indicate that some A items based on annual inventory dollar
usage are showing up as B or C items based on the current inventory value
classification and that some B items have similarly been classified as C items.
This suggests that the company has current inventories for its A and B items that
are too low, and is risking stockouts of their higher dollar usage items.
Conversely, plots in the lower-right shaded triangle show that some C items based
on annual inventory dollar usage are showing up as A and B items based on
current inventory value, and some B items are similarly showing up as A items;
thus indicating that the company has current inventories for its B and C items that
are too high, and is incurring excess inventory carrying costs.
This may also point to the presence of excessive obsolete
stock if the inventory turnover ratios are very low.
Obsolete stocks should be disposed of so that valuable
inventory investment and warehouse space can be used for
productive inventory.
When used in conjunction with inventory turnovers, the
ABC inventory matrix is a powerful tool for managing
inventory investment.
Example 7.2 shows the classifications based on current
inventory value for the same ten items shown in Example
7.1, and it also shows the annual dollar usage
classifications.
The two ABC analyses from Examples 7.1 and 7.2 are combined and plotted on
the ABC inventory matrix shown in Figure 7.2. Each inventory item is plotted on
the matrix using the “percent of total current inventory” on the horizontal axis
and the “percent of total annual dollar usage” on the vertical axis. For instance,
the coordinate of the item “T519” would be (40.5, 0.4).
The vertical axis ranges from 0.4 percent to 35.2 percent, and the horizontal aixs
ranges from 0.2 percent to 40.5 percent, thus “T519” falls on the extreme lower-
right corner of the matrix.
The plots in Figure 7.2 show that six of the inventory items fell along the
diagonal, suggesting the appropriate stocking levels. The company has probably
overstocked items “T519” and “L227” and understocked “N376” and possibly
“R116”. It is important however, that the inventory turnover ratios for each item
be used in conjunction with the ABC inventory matrix to get a sense of how fast
or slow inventories are turning over.
