ABC classification is a type of ranking system where the inventory raw materials are divided into different groups based on how useful they are for the production. This will help in maintaining a smooth flow of production without causing any hold-up or delay. The items are divided into 3 groups:
A – Covers the most important items for production
B – Contains the list of moderately important items
C – These items are relatively unimportant
This classification considers the well-known 80/20 rule which states that 80% of the results are dependent on 20% of the inputs. ABC classification helps the firm to identify the 20% factors that influence the health of the production. It also helps to control these factors efficiently. The factors contributing to A category needs more attention than the other 2 categories. In such manner the firm can take good care of its resources and manage the production according to the needs.