A $40 gasket set can shut down a filling line. On an ABC report it sits at the very bottom of class C, next to the drive belts, and gets the least attention of anything in the plant.
That is the problem with applying standard ABC analysis in a factory. The method in Post 1 ranks items by annual dollar usage, and for a distributor that works well: when an item runs out, you lose that item's sales. In a plant, running out of one input can stop everything that depends on it. The cost of a stockout has little to do with the price of the part.
This post keeps the ABC method and adds one thing to it: a criticality rating. If you have not read Post 1, start there for the five steps. Here we cover only what changes for a manufacturer.
Three pools of inventory, three behaviours
A distributor holds one kind of inventory: finished goods for sale. A manufacturer holds several, and each follows different rules.
| Pool | What drives its demand | What a stockout costs | How to classify it |
|---|---|---|---|
| Raw materials and packaging | The production schedule. Usage follows what you plan to make. | A delayed or cancelled batch, idle labour, late customer orders | ABC by annual value consumed, plus criticality |
| Spare parts and maintenance supplies | Equipment wear and failure. Usage is low and irregular. | Downtime on the equipment, and everything downstream of it | Criticality first; value is almost irrelevant |
| Work in progress | Your own process and batch sizes | Rarely a stockout; the cost is cash and floor space | Leave out of ABC. Control it through scheduling. |
| Finished goods | Customer orders | A lost or late sale | Standard ABC by sales, as in Post 1 |
Two practical points follow. First, use consumption, the quantity issued to production or maintenance, not purchases. Purchases reflect when you bought, not what you used. Second, keep the unit of measure consistent. If resin is bought by the drum and issued by the kilogram, convert before you multiply.
A worked example: a coatings manufacturer
Ridgeline Coatings is a fictional maker of industrial coatings. The list below covers 20 purchased items across raw materials, packaging and spare parts, with a combined annual usage of $2,420,750. It is ranked exactly as in Post 1, with cut-offs at 80% and 95% of cumulative value.
| Rank | Item | Pool | Annual usage | Unit cost | Annual value | Cumulative % | Class |
|---|---|---|---|---|---|---|---|
| 1 | RM-01 Epoxy resin | Raw material | 180,000 kg | $4.20 | $756,000 | 31.2% | A |
| 2 | RM-02 Titanium dioxide pigment | Raw material | 95,000 kg | $3.80 | $361,000 | 46.1% | A |
| 3 | RM-03 Xylene solvent | Raw material | 210,000 L | $1.35 | $283,500 | 57.9% | A |
| 4 | PK-01 20 L steel pail with lid | Packaging | 48,000 | $5.60 | $268,800 | 69.0% | A |
| 5 | RM-04 Polyamine hardener | Raw material | 42,000 kg | $6.10 | $256,200 | 79.5% | A |
| 6 | RM-05 Acrylic resin | Raw material | 38,000 kg | $3.50 | $133,000 | 85.0% | B |
| 7 | PK-02 4 L can with lid | Packaging | 60,000 | $1.90 | $114,000 | 89.7% | B |
| 8 | RM-06 Calcium carbonate extender | Raw material | 160,000 kg | $0.45 | $72,000 | 92.7% | B |
| 9 | RM-07 Iron oxide red pigment | Raw material | 9,000 kg | $5.20 | $46,800 | 94.7% | B |
| 10 | PK-04 Pallets | Packaging | 2,600 | $14.00 | $36,400 | 96.2% | C |
| 11 | RM-08 Dispersant additive | Raw material | 2,400 kg | $14.00 | $33,600 | 97.5% | C |
| 12 | RM-09 Defoamer additive | Raw material | 1,100 kg | $11.50 | $12,650 | 98.1% | C |
| 13 | SP-03 Filter bags, box of 50 | Spare part | 90 | $120.00 | $10,800 | 98.5% | C |
| 14 | PK-03 Product labels, per 1,000 | Packaging | 120 | $85.00 | $10,200 | 98.9% | C |
| 15 | RM-10 Thickener | Raw material | 900 kg | $9.00 | $8,100 | 99.3% | C |
| 16 | SP-01 Disperser mechanical seal | Spare part | 4 | $1,850.00 | $7,400 | 99.6% | C |
| 17 | SP-04 Pump diaphragm kit | Spare part | 12 | $310.00 | $3,720 | 99.7% | C |
| 18 | SP-06 Dispersion blade | Spare part | 6 | $480.00 | $2,880 | 99.8% | C |
| 19 | SP-02 Filling line gasket set | Spare part | 60 | $40.00 | $2,400 | 99.9% | C |
| 20 | SP-05 Drive belt | Spare part | 20 | $65.00 | $1,300 | 100.0% | C |
The split looks familiar: 5 A items carry 79.5% of the value, 4 B items carry 15.1%, and 11 C items carry 5.3%. By the usual logic, the plant would now manage five items closely and put the bottom eleven on autopilot.
What the value ranking misses
Now mark the items that would stop production if they ran out. The plant's production and maintenance leads identify six.
Three of the six are A items: epoxy resin, titanium dioxide and hardener. Value-based ABC already gives them attention. The other three are buried in class C:
- RM-08 Dispersant additive, $33,600 a year. Every batch needs it, it comes from a single supplier, and the lead time is eight weeks.
- SP-01 Disperser mechanical seal, $7,400 a year. The plant uses about four a year, and a replacement takes ten weeks to arrive.
- SP-02 Filling line gasket set, $2,400 a year. The $40 part from the opening paragraph.
Together these three are worth $43,400 a year, under 2% of the total. Managed as ordinary C items, they would be counted once a year and reordered when someone noticed the bin was empty.
The ranking misleads in the other direction too. All six spare parts fall in class C, with a combined value of $28,500. A value-only view says spares do not matter. Any maintenance manager will tell you otherwise.
Add a criticality rating
The fix is a second label on every item. Ask three questions: if we ran out today, would a line stop? Is there a substitute or a second supplier? How long would it take to get more?
| Rating | Meaning |
|---|---|
| 1. Vital | Production stops. There is no substitute, and resupply takes weeks. |
| 2. Essential | Production is disrupted, but a substitute, second supplier or workaround is available within days. |
| 3. Desirable | No effect on output. Available locally the same day or week. |
Production and maintenance staff should set these ratings, not purchasing alone. They know which parts have no workaround.
The two labels together decide the control policy. Value sets how tightly you manage the item; criticality sets how much protection it gets.
| Class | Vital (1) | Essential (2) | Desirable (3) |
|---|---|---|---|
| A | Tight control and protected supply: forecast-driven orders, a supply agreement or second source, high service level | Tight control with lean stock: frequent orders, no excess buffer | Tight control with minimum stock: buy close to need |
| B | Standard reorder point with a raised service level | Standard reorder point | Standard reorder point with a lower service level |
| C | Never run out: hold a generous fixed minimum and check it on a schedule | Simple min/max or two-bin | Buy on demand, or hold a token quantity |
What changes at Ridgeline
- The three vital C items get protection. Two spare mechanical seals on the shelf cost $3,700 and ten gasket sets cost $400. A three-month minimum of dispersant, 600 kg, costs $8,400. That is $12,500 in total to cover three items that can each stop the plant.
- The non-vital A items get leaner. Xylene and steel pails are high in value but available from several local suppliers. They need frequent orders and close tracking, not a large buffer.
- The vital A items get both. Epoxy resin, titanium dioxide and hardener are expensive and irreplaceable. These justify supply agreements, a qualified second source and the careful safety stock calculation covered in the next post.
Pitfalls specific to manufacturers
One year is too short for spare parts. A seal that fails every three years shows zero usage in most years. Use three to five years of history for spares, and never delete a vital part because it did not move last year.
Shelf life caps the buffer. "Hold plenty of the cheap items" works for gaskets. It does not work for a catalyst or additive with a six-month shelf life. Set the maximum stock below what you will use before it expires.
History misleads when the product mix is changing. Raw material usage follows the production plan. If you are launching a product or dropping one, rank materials on planned usage for the next 12 months, not on the last 12.
Dead stock is invisible to ABC. The analysis ranks by usage, so an item with stock on the shelf and no usage never appears. Run a separate report of items with no movement in 12 months.
Report by pool. A single list is fine for ranking. For review meetings, show raw materials, packaging and spares separately, because different people own each one.
Re-rate after equipment changes. A new filling line or a decommissioned mixer changes which spares are vital. Review criticality whenever the equipment list changes, and at least once a year.
Your checklist
- List purchased items by pool: raw materials, packaging, spare parts
- Pull 12 months of consumption for materials, and three to five years for spares
- Run the ABC ranking by annual value
- Rate every item for criticality with production and maintenance
- Flag every vital item in class C and set a fixed minimum for it
- Check shelf life before raising any buffer
- Run a no-movement report for dead stock
Next in the series: Post 4 sets safety stock for a manufacturer, where raw material demand comes from the production schedule and spare parts need a different method altogether.
Chmltech Ltd. helps small and mid-sized businesses improve operations and adopt digital tools. If you would like help applying this to your own inventory, get in touch.
