The Abc Inventory Analysis

Topics: Inventory, Manufacturing resource planning, Material requirements planning Pages: 10 (3131 words) Published: June 18, 2013
Analyze the Inventory Models

The ABC Inventory Analysis
The ABC analysis is a business term used to define an inventory categorization technique often used in materials management. It is also known as Selective Inventory Control. Policies based on ABC analysis: * A ITEMS: very tight control and accurate records

* B ITEMS: less tightly controlled and good records
* C ITEMS: simplest controls possible and minimal records The ABC analysis provides a mechanism for identifying items that will have a significant impact on overall inventory cost. while also providing a mechanism for identifying different categories of stock that will require different management and controls. The ABC analysis suggests that inventories of an organization are not of equal value. Thus, the inventory is grouped into three categories (A, B, and C) in order of their estimated importance. 'A' items are very important for an organization. Because of the high value of these ‘A’ items, frequent value analysis is required. In addition to that, an organization needs to choose an appropriate order pattern (e.g. ‘Just- in- time’) to avoid excess capacity. 'B' items are important, but of course less important, than ‘A’ items and more important than ‘C’ items. Therefore ‘B’ items are intergroup items. 'C' items are marginally important.

ABC analysis categories
There are no fixed threshold for each class, different proportion can be applied based on objective and criteria. ABC Analysis is similar to the Pareto principle in that the 'A' items will typically account for a large proportion of the overall value but a small percentage of number of items. Example of ABC class are

* ‘A’ items – 20% of the items accounts for 70% of the annual consumption value of the items. * ‘B’ items - 30% of the items accounts for 25% of the annual consumption value of the items. * ‘C’ items - 50% of the items accounts for 5% of the annual consumption value of the items. Another recommended breakdown of ABC classes.

1. "A" approximately 10% of items or 66.6% of value
2. "B" approximately 20% of items or 23.3% of value
3. "C" approximately 70% of items or 10.1% of value

ABC Analysis in ERP package
Major ERP packages (SAP, Oracle, Microsoft, etc.) have built in function of ABC analysis. User can execute ABC analysis based on user defined criteria and system apply ABC code to items (parts). See detail at external link.

Example of the Application of Weighed Operation based on ABC class Actual distribution of ABC class in the electronics manufacturing company with 4051 active parts. 

Distribution of ABC class|
ABC class| Number of items| Total amount required|
A| 5%| 70%|
B| 10%| 15%|
C| 85%| 15%|
Total| 100%| 100%|
Using this distribution of ABC class and change total number of the parts to 4000. * Uniform Purchase
When you apply equal purchasing policy to all 4000 components, example weekly delivery and re-order point (safety stock) of 2 week supply assuming that there are no lot size constraints, the factory will have 16000 delivery in 4 weeks and average inventory will be 2.5 week supply. Application of Weighed Purchasing condition|

Uniform condition| Weighed condition|
Items| Conditions| Items| Conditions|
 All items 4000|  Re-order point=2 week supply
Delivery frequency=weekly| A-class items 200| Re-order point=1 week supply Delivery frequency=weekly|
| | B-class items 400| Re-order point=2 week supply
Delivery frequency=bi-weekly|
| | C-class items 3400| Re-order point=3 week supply
Delivery frequency=every 4 weeks|
* Weighed Purchase
In comparison, when weighed purchasing policy applied based on ABC class, example C class monthly (every 4 week) delivery with re-order point of 3 week supply, B class Bi-weekly...
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