ABC Analysis OMSM | Strategic Management | CMA Inter Paper 09 | CA Simran Rajani (AIR 43) | June'26

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📊 ABC Analysis (OMSM – Strategic Management, CMA Inter Paper 09)

ABC Analysis is an inventory management technique used to categorize items based on their importance, usually measured in terms of consumption value (cost × usage). It helps businesses focus their attention on the most critical items.

🔑 Concept

The method divides inventory into three categories:

A Items (High Value)
Small in number (typically 10–20%)
Very high consumption value (around 70–80%)
Require strict control and continuous monitoring
B Items (Moderate Value)
Moderate in number (20–30%)
Moderate consumption value (15–25%)
Need periodic review
C Items (Low Value)
Large in number (50–70%)
Low consumption value (5–10%)
Simple controls are enough
🎯 Objectives
Optimize inventory control
Reduce carrying and ordering costs
Focus management effort on critical items
Improve profitability and efficiency
⚙️ Steps in ABC Analysis
Calculate annual consumption value (Unit Cost × Annual Usage)
Rank items in descending order of value
Compute cumulative percentages
Classify into A, B, and C categories
📌 Example

Suppose a company has 100 inventory items:

Top 10 items contribute 75% of value → A Category
Next 20 items contribute 20% → B Category
Remaining 70 items contribute 5% → C Category
🧠 Managerial Implications
A items: Tight inventory control, accurate forecasting, frequent ordering
B items: Moderate control
C items: Bulk ordering, minimal supervision
⚖️ Advantages
Better resource allocation
Cost control
Improved decision-making
⚠️ Limitations
Ignores factors like criticality and lead time
Not suitable alone for all decisions
Needs regular updating
📚 Exam Tip (CMA Inter)

You may be asked to:

Classify items into A/B/C based on data
Explain advantages or limitations
Apply it in case studies within Strategic Management (OMSM)

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