The ABC (Activity Based Costing) method applied to construction

The ABC (Activity Based Costing) method helps construction companies to better understand and manage their direct and indirect costs, in particular by optimizing the management of materials and equipment stocks. This article explains how this approach can transform your financial management, increase your margins, and improve your processes. storage and supply.

What is the ABC inventory classification method?

The ABC (Activity Based Costing) approach is a performance management method. It allows for a better understanding of costs andoptimize the profitability of a construction site.

Definition of the ABC method for classifying stocks

The ABC method of classifying stocks is a management approach that makes it possible to organize warehouse goods in an efficient manner, based on their importance for the business, their value, and their turnover rate. With this system, the purchase and replenishment of stocks are made according to the economic contribution they represent, rather than their volume or quantity.

The ABC method is based on the Pareto law (or 80-20 law), which states that 20% of products frequently used on a construction site represent 80% of the use value of inventories. Applied to inventory management, this logic reveals that 20% of items correspond to 80% of merchandise movements, while the remaining 80% generate only 20% of these movements.

Inventory categories using the ABC method

We thus classify stocks into three main categories:

Articles A

These items generally represent 20% of total inventory quantity but are used most frequently on the construction site. They are therefore strategically the most important for the company. They require the most investment and generate 80% of goods movements. It is essential to avoid running out of stock for this category.

A-items are normally located in the most accessible areas of the warehouse, near the exit docks. This allows direct and easy access for construction crews.

Articles B

They make up around 30% of inventory and have an average turnover. Their importance for the business is lower to that of category A products. It is necessary to monitor the evolution of items B to ensure that they do not pass to categories A or C.

These items are located in intermediate areas of the warehouse, with less direct access than for A products.

Articles C

These products represent approximately 50% of the references stored but are the least used on construction sites. Being the least strategic, the resources devoted to their management are reduced and their replenishment often depends on safety stocks.

These items generally occupy the highest or least accessible areas of the warehouse, as well as the areas farthest from the exit docks.

Practical example

For example, in a warehouse of a construction company specializing in structural work, the ABC method makes it possible to accurately allocate storage and handling costs according to the frequency of use of the items. Frequently used materials such as cement bags, steels and cinder blocks, which represent 20% of items but 80% of movements, would be classified in category A and placed in easily accessible areas. Materials used in an intermediate manner, such as standard scaffolding and formwork panels, would be classified in category B and stored in intermediate areas with moderate access. On the other hand, bulky but rarely used materials, such as specific formwork elements, lifting equipment, or specialized insulators, would be classified in category C and stored in less accessible areas.

The ABC method thus provides a clear view of the use of stocks and the costs incurred. It helps businesses to improve their processes and efficiency.

Implementation of the ABC method in 4 steps

The ABC method therefore makes it possible to better understand and manage stocks. Here are the steps to implement it in your business.

Identifying the items stored in your warehouse

This first step consists of identify all items stored in the warehouse and classify them according to their importance, value and frequency of use. This includes materials, tools, and other resources needed for construction sites.

You can ask warehouse managers, construction managers, and team leaders for this task.

Allocation of costs to activities

Once items have been identified, they should be classified in the three categories according to their frequency of use and their strategic importance:

• Items A: frequently used items (around 20% of items) but representing 80% of stock movements. Example: cement bags, reinforcing bars, cinder blocks.
• Items B: items with an average turnover (around 30% of items). Example: scaffolding, formwork.
• Items C: items that are rarely used (around 50% of items) and represent a small portion of stock movements. Example: certain types of insulators or specialized equipment.

Determination of storage and handling criteria for each category

For each category of items, determine storage and handling criteria. This may be the location in the warehouse, the frequency of replenishment, and the resources allocated to managing these stocks:

• Items A: they should be placed in easily accessible areas, near exit platforms for quick access.
• Items B: they are instead positioned in intermediate areas with moderate access.
• Items C: they are located in the highest or least accessible areas of the warehouse, as well as the areas farthest from the exit docks.

Inventory monitoring and adjustment

After implementing the ABC classification, it is important to monitor and adjust inventory regularly based on real needs and changes in construction projects. This includes:

• Inventory turnover monitoring: analyze stock movements regularly to adjust categories if necessary.
• An adjustment in stock levels: Ensure that stock levels for items A are sufficient to avoid stockouts, and that items B and C are maintained at optimal levels to minimize storage costs.

The ABC method makes it possible to obtain a very detailed view of inventory management. It facilitates the optimization of storage space and allocated resources, and contributes to more efficient management of construction sites.

The advantages of the ABC method of inventory classification in the construction sector

The implementation of the ABC method for inventory management offers several advantages to improve the efficiency and profitability of a construction company:

• Understanding storage costs: By categorizing items into categories A, B, and C, businesses can better understand and manage the costs associated with storing and handling materials.
• Reducing unnecessary storage costs: By focusing on the most frequently used items and reducing inventories of less critical materials, businesses can minimize unnecessary storage costs.
• Management focused on precise stock control: the ABC method allows for more rigorous monitoring and more accurate management of stock levels. This reduces the risk of breakage or overstocking.
• Optimization of margins and improvement of logistics: By adjusting storage and replenishment processes according to the category of items, businesses can improve their logistics and optimize their profit margins.

The application of the ABC method requires an initial investment in specialized knowledge and sometimes the help of external consultants. However, the advantages in terms of inventory management and profitability make it effective for many businesses.

By using the ABC method for inventory management in construction, companies can not only reduce unnecessary storage costs, but also ensure the constant availability of materials. This thus improves the fluidity of operations and customer satisfaction.

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