ABC Analysis for Inventory Management Essay

In generate chain, ABC depth psychology is an bloodline categorization method which consists in dividing decimal points into three categories, A, B and C A being the most priceless relics, C being the least valuable ones. This method aims to draw managers attention on the critical few (Aitems) and not on the trivial many (C-items).Prioritization of the counselling attention instrument optimization is critical in order to keep costs under visit within the supply chain. Yet, in order to get the most from management efforts, it is efficient to focus on items that cost most to the business.The P areto principle states that 80% of the over every drug addiction value is based on only 20% of kernel items. In other words, demand is not even outly distributed amongst items top sellers vastly proscribedperform the ataraxis.The ABC approach states that, when reviewing record, a bon ton should rate items from A to C, basing its ratings on the following rulesA-items are goods whic h annual use of goods and services value is the highest. The top 70-80% of the annual aspiration value of the company typic everyy accounts for only 10-20% of total list items.C-items are, on the contrary, items with the lowest consumption value. The glare 5% of the annual consumption value typically accounts for 50% of total scrutinise items.B-items are the interclass items, with a medium consumption value. Those 15-25% of annual consumption value typically accounts for 30% of total line of descent items.The annual consumption value is manoeuvred with the formula (Annual demand) x (item cost per unit of measurement).Through this categorization, the supply manager can identify inventory hot spots, and separate them from the rest of the items, especially those that are numerous but not that profitable.The following go will explain to you the com billetmentalization of items into A, B and C categories. 1. Find out the unit cost and and the routine of each material over a gi ven period. 2. Multiply the unit cost by the estimated annual usage to obtain the net value. 3. List out all the items and arrange them in the descending value. (Annual Value) 4. Accumulate value and add up outcome of items and calculate percentage on total inventory in value and in number.5. Draw a curve of percentage items and percentage value.6. Mark arrive at from the curve the rational limits of A, B and C categories.eCommerce exampleThe graph to a higher place illustrates the yearly gross revenue distribution of a US eCommerce in 2011 for all products that cause been sell at least one. Products are ranked start with the highest sales volumes. Out of 17000 referencesTop 2500 products (Top 15%) represent 70% of the sales. beside 4000 products (Next 25%) represent 20% of the sales.Bottom 10500 products (Bottom 60%) represents 10% of the sales. record management policiesPolicies based on ABC epitome leverage the sales imbalance outlined by the Pareto principle. This implies that each item should receive a weighed treatment corresponding to its class A-items should have tight inventory control, much secured storage areas and better sales forecasts. Reorders should should be frequent, with weekly or even daily reorder. Avoiding stock-outs on A-items is a antecedence.Reordering C-items is made less frequently. A typically inventory policy for C-items consist of having only 1 unit on hand, and of reordering only when an actual purchase is made. This approach leads to stock-out office staff after each purchase which can be an acceptable situation, as the C-items present both low demand and higher risk of unjustified inventory costs. For C-items, the question is not so much how many units do we store? but rather do we even keep this item in store?B-items benefit from an intermediate status between A and C. An important aspect of class B is the monitoring of potential developing toward class A or, in the contrary, toward the class C.Splitting items in A, B and C classes is relatively arbitrary. This grouping only represents a rather frank interpretation of the Pareto principle. In practice, sales volume is not the only measured that weighs the importance of an item. Margin but also the impact of a stock-out on the business of the client should also influence the inventory strategy. Procurement and warehouse ApplicationsThe cores of an ABC Analysis extend into a number of other inventory control and management processes1. Review of stocking levels As with investings, past results are no guarantee of future performance. However, A items will by and large have greater impact on projected investment and acquire spend, and therefore should be managed more aggressively in terms of nominal and maximum inventory levels.Obsolescence review By definition, inactive items will fall out to the scum bag of the prioritized list. Therefore, the bottom of the C category is the best place to start when performing a periodic obsolescence r eview. 2. Cycle counting The higher the usage, the more activity an item is likely to have, hence the greater likelihood that transaction issues will result in inventory errors. Therefore, to ensure accurate record balances, higher priority items are cycle counted more frequently. Generally A items are counted at a time every quarter B items once every 6 months and C items once every 12 months.3. Identifying items for potential consignment or marketer stocking Since A items tend to have a greater impact on investment, these would be the best candi ages to investigate the potential for alternative stocking arrangements that would reduce investment liability and associated carrying costs.4. Turnover ratios and associated inventory goals By definition, A items will have greater usage than B or C items, and as a result should have greater turnover ratios. When establishing investment and turnover metrics, inventory data can be segregated by ABC potpourri, with different targets f or each category. Definition of Inventory TurnoverA ratio video display how many times a companys inventory is sold and replaced over a period. thePeriodic ReviewTo make the most effectual use of ABC classifications, the analysis should be completed at least on an annual basis, and more often as necessary.Other Inventory Classification TechniquesHML ClassificationsThe High, medium and Low (HML) classification follows the same procedure as is adopted in ABC classification. Only difference is that in HML, the classification unit value is the criterion and not the annual consumption value. The items of inventory should be listed in the descending order of unit value and it is up to the management to fix limits for three categories. For examples, the management may decide that all units with unit value of Rs. 2000 and above will be H items, Rs. pace to 2000 M items and less than Rs. 1000 L items. The HML analysis is efficacious for keeping control over consumption at departmental l evels, for deciding the relative frequency of physical verification, and for controlling purchases. VED ClassificationWhile in ABC, classification inventories are classified on the basis of their consumption value and in HML analysis the unit value is the basis, criticality of inventories is the basis for bouncy, essential and desirable categorization.The VED analysis is done to determine the criticality of an item and its effect on intersection and other services. It is specially used for classification of spare parts. If a part is vital it is given V classification, if it is essential, then it is given E classification and if it is not so essential, the part is given D classification. For V items, a large stock of inventory is generally maintained, while for D items, minimum stock is enough.SDE ClassificationThe SDE analysis is based upon the availability of items and is very useful in the context of scarcity of supply. In this analysis, S refers to scarce items, generally impo rted, and those which are in short supply. D refers to difficult items which are gettable indigenously but are difficult items to procure. Items which have to come from nonadjacent places or for which reliable suppliers are difficult to come by fall into D category. E refers to items which are easy to acquire and which are accessible in the local markets.The SDE classification, based on problems faced in procurement, is vital to the lead time analysis and in deciding on purchasing strategies.FSN AnalysisFSN stands for fast moving, slow moving and non-moving. Here, classification is based on the pattern of issues from stores and is useful in controlling obsolescence. To carry out an FSN analysis, the date of receipt or the last date of issue, whichever is later, is taken to determine the number of months, which have lapsed since the last transaction. The items are usually grouped in periods of 12 months.FSN analysis is helpful in identifying active items which need to be reviewed regularly and surplus items which have to be examined raise. Non-moving items may be examined further and their disposal can be considered.