The management of the items found in the inventory is of vital importance, since these are the ones that largely determine the allocation of costs in the production process and determine to a high degree the level of efficiency and effectiveness of financial management.
The inventory represents a considerable investment by manufacturing companies, which is why it is essential to pay special attention to its management.
In order to carry out an efficient administration, those responsible for this area must control all inventory levels and consider that this is a significant investment that, if not managed properly, can become a problem that would affect the financial management of the company.
ABC and company
A company that has a large number of inventory items must analyze each one to determine the approximate investment per unit.
Thematic opening
A large number of organizations have in their warehouses a large number of items that do not have the same characteristics, many of these items are relatively low-cost, while others are quite expensive and represent a large part of the company's investment. Some of the inventory items, although not particularly expensive, have low turnover and therefore require considerable investment; Other items, while high in cost per unit, rotate quickly enough so that the investment required is relatively low.
In most companies the distribution of inventory items is 20% corresponding to 90% of the investment in inventory, while the remaining 80% of the items correspond only to 10% of said investment, which is why it was necessary to formulate a new allocation system in the priority given to the stocks managed by the company: The activity-based cost system or ABC costing.
The application of the ABC cost system in a company for inventory control begins with the classification into groups of items like this:
- Items "A" which are those in which the company has the largest investment, these represent approximately 20% of inventory items that absorb 90% of investment. These are the most expensive or the slowest to rotate in inventory. Items "B" are those that correspond to the next investment in terms of cost. They consist of 30% of the items that require 8% of the investment. "C" items are those that normally in a large number of items corresponding to the smallest investment. It consists of approximately 50% of all inventory items but only 2% of the company's investment in inventory.
Although the ABC costing system has some structural shortcomings, it is an excellent method of determining the degree of control intensity that should be devoted to each item in inventory.
Differentiating inventory into items "A", "B" and "C" allows the company to determine the level and types of inventory control procedures required.
The control of items "A" in the inventory must be very intensive due to the considerable investment made. These types of items must be implemented with the most sophisticated inventory control techniques.
In articles «B» they can be controlled using less sophisticated techniques but efficient in their results.
In articles "C" the control is minimal.
It should be borne in mind that the ABC costing model of inventory control does not have application in all companies, since certain inventory items that are low in cost can be definitive in the production process and are not easily attainable in the market, that is why they need special attention.
The control that is exercised in this system is directly related to the control that is made of the costs, since by having a better distribution of inventories, the cost of warehousing, maintenance, surveillance, losses and obsolescence can be contrasted with a better shape.
Finally, it is necessary to know all the theoretical and technical foundations applied to implement an activity-based system, since its methodology is much more profound and depends on the type of company in which it is used.
