A modern system of inventory control which is economical too, is ABC system. In large companies, the inventory consists of thousands of items and a number of employees are employed to control them. Their salaries and other expenses run into lakhs of rupees. In order to affect economy in controlling such large inventory, a system known as ABC (Always Better Control) has been widely used.

Some items included in the inventory, are of very low value and its detailed accounting is not economical. Hence, such items must be stored in sufficient quantity and its use is not restricted. Of course, at the time of annual stock taking, it must be assured that its consumption does not considerably exceed the average consumption. Such items may be purchased whenever its stock is exhausted. This will reduce greatly the clerical work in checking all the items of inventory.

It has been found from experience that all items included in inventory are not of equal importance. A few items in the inventory represent a large proportion of the total value of inventory. Hence, more attention must be devoted to the control of such items. All the items are divided into three categories A, B & C.

(1) In Category A are included those items which are very important and of high value but forms only a small proportion of total quantity of inventory. They constitute hardly 10 per cent of the total number of items included in inventory, but represent as much as 70 per cent of the value of stores. For “example, in case of General Electric Co. of the USA, 75 % of the total money invested in inventory was covered by 8 % of the total number of items. Strict control over receipts, storage and issue should be exercised over such items. Its requirements must be estimated in advance and its purchases must be planned, so that it is available as and when needed.

(2) Items included in Category B are not as important as those in a group, but are important enough for its proper records to be maintained. They constitute 20 to 25 per cent of the total number of items, but represent 15 to 25 % of the total value of inventory. Maximum and minimum levels must be fixed for such items and they must be issued against proper material requisition only.

(3) The remaining items must be placed in Category C. They are not important from the viewpoint of maintaining control over their receipts and consumption. Such items constitute 70 to 75 per cent of the total number of items, but they represent 5 to 10 per cent of the total value. If such items are strictly controlled, the total cost of controlling would exceed the savings affected by it. Hence, its consumption is left unrestricted.

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