Post on 15-Nov-2014
transcript
ABC Analysis for Inventory
Michael IosuaMBA 530, Dr. Foster
Class of 2009
Items to be covered1. What is ABC Analysis for Inventory?2. Brainstorming Activity3. Nuts and Bolts4. How ABC Analysis works5. A “Real World” Example6. ABC Analysis Exercise7. Summary8. Further Readings9. Appendix
What is ABC Analysis for Inventory?
• An inventory control system
• Categorizes by dollar volume contribution
• Valuable for small businesses
Brainstorming Exercise
• Which items contribute most to your dollar volume?
• What is your inventory control method?
• How much inventory is wasted due to lack of inventory control?
Nuts and Bolts
1. Strict control of high dollar volume items
2. Higher inventory control level
3. Leads to inventory turnover and service level increases
4. Resources are better allocated to control efforts.
Drawbacks of ABC Analysis for Inventory
• Less control over B and C, etc. items
• Not an “all-purpose” inventory control method
• Profit not necessarily maximized
How does ABC analysis work?
Steps in ABC Analysis:
1. Determine the dollar volume
2. Rank items.
3. Calculate the percentage dollar volume for each item.
How does ABC analysis work? (continued)
4. Determine the cumulative percentages for number of items and dollar volume
5. Classify items as A, B, C, etc.
A “Real World” Example
Sam-Mart Produce Department
Sam-Mart Produce Dept.
• Continually dumps produce due to spoilage
• Has difficulty keeping its stock current
• Must reduce spoilage costs
Sam-Mart Produce Dept.
Product Pounds Sold Cost/lb $ Value
Mangoes 60 $ 4.00
Lettuce 1000 $ 1.00
Bananas 500 $ .75
Tomatoes 1000 $ 2.00
Totals 100
Sam-Mart Produce Dept.
Step One: Determine dollar value
Product Pounds Sold Cost/lb $ Value
Mangoes 650 $ 4.50 $ 2925.00
Lettuce 1950 $ .50 $ 975.00
Bananas 2500 $ .60 $ 1500.00
Tomatoes 900 $ .90 $ 810.00
Totals 6000 $ 6210.00
Step Two: Rank Items
Rank Product $ Value % of $Cum % of $ value
Cum % of units
Class
1 Mangoes $ 2925
2 Bananas $ 1500
3 Lettuce $ 975
4 Tomatoes $ 810
Totals $ 6210
Step Three: Calculate percentage of total dollar volume for each item
Rank Product $ Value % of $Cum % of $ value
Cum % of units
Class
1 Mangoes $ 2925 47.1%
2 Bananas $ 1500 24.2%
3 Lettuce $ 975 15.7%
4 Tomatoes $ 810 13.0%
Totals $ 6210 100.0%
Step Four: Determine cumulative percentages
Rank Product $ Value % of $Cum % of $ value
Cum % of units
Class
1 Mangoes $ 2925 47.1% 47.1% 10.8%
2 Bananas $ 1500 24.2% 71.3% 52.5%
3 Lettuce $ 975 15.7% 87.0% 85.0%
4 Tomatoes $ 810 13.0% 100.0% 100.0%
Totals $ 6210 100.0%
Step Five: Classify items
Rank Product $ Value % of $Cum % of $ value
Cum % of units
Class
1 Mangoes $ 2925 47.1% 47.1% 10.8% A
2 Bananas $ 1500 24.2% 71.3% 52.5% B
3 Lettuce $ 975 15.7% 87.0% 85.0% C
4 Tomatoes $ 810 13.0% 100.0% 100.0% C
Totals $ 6210 100.0%
ABC Analysis Exercise
• Earnhardt Auto-Mart
• Sells water pump, timing belt, oil filter, quart of oil
• Needs to improve inventory control
Earnhardt Auto-Mart
Product Items sold Cost per item $ Value
Water Pump 10 $ 150
Timing belt 10 $ 50
Oil filter 50 $ 15
Oil quart 100 $ 3
Totals 170
Summary
• Priority on high dollar volume items
• Tighter control of priority items
• Not an “all purpose” method
• Holds to Pareto rule
Further Readings• Bhattacharya, Arijit; Sarkar, Bijan; Mukherjee, Sanat.
(2007). Distance-based consensus method for ABC analysis. International Journal of Production Research, 45(15), pp. 3405-21. Retrieved from Business Source Premier.
• Partovi, Fariborz; Hopton, Walter. THE ANALYTIC HIERARCHY PROCESS APPLIED TO TWO TYPES OF INVENTORY PROBLEMS. Production & Inventory Management Journal, 35(1), pp. 13-20. Retrieved from Business Source Premier.
Further Readings (continued)
• Flores, Benito; Whybark, D. Clay. IMPLEMENTING MULTIPLE CRITERIA ABC ANALYSIS. Engineering Costs & Production Engineering, 15(1-4), pp. 191-6. Retrieved from Business Source Premier.
Appendix
References• Fuerst, William J. SMALL BUSINESSES GET A NEW
LOOK AT ABC ANALYSIS FOR INVENTORY CONTROL. Journal of Small Business Management, 45(15), pp. 39-44. Retrieved from Business Source Premier.
• Caldwell, Bruce D. The Benefits of ABC Analysis for Inventory Reduction. The Connecticut Association of Purchasing Management, Inc. Retrieved November 20, 2007, from http://www.capminc.org/abcanalysis.htm
Earnhardt Auto-Mart
Product Items sold Cost per item $ Value
Water Pump 10 $ 150
Timing belt 10 $ 50
Oil filter 50 $ 15
Oil quart 100 $ 3
Totals 170
Step One: Determine dollar value
Product Items sold Cost per item $ Value
Water Pump 10 $ 150 $ 1500
Timing belt 10 $ 50 $ 500
Oil filter 50 $ 15 $ 750
Oil quart 100 $ 3 $ 300
Totals 170 $ 3050
Step Two: Rank Items
Rank Product $ Value % of $Cum % of $ value
Cum % of units
Class
1 Water pump
$ 1500
2 Oil filter $ 750
3 Timing belt
$ 500
4 Oil quart $ 300
Totals $ 3050
Step Three: Calculate percentage of total dollar volume for each item
Rank Product $ Value % of $Cum % of $ value
Cum % of units
Class
1 Water pump
$ 1500 49.2%
2 Oil filter $ 750 24.6%
3 Timing belt
$ 500 16.4%
4 Oil quart $ 300 9.8%
Totals $ 3050 100.0%
Step Four: Determine cumulative percentages
Rank Product $ Value % of $Cum % of $ value
Cum % of units
Class
1 Water pump
$ 1500 49.2% 49.2% 5.9%
2 Oil filter $ 750 24.6% 73.8% 35.3%
3 Timing belt
$ 500 16.4% 90.2% 41.2%
4 Oil quart $ 300 9.8% 100.0% 100.0%
Totals $ 3050 100.0%
Step Five: Classify items
Rank Product $ Value % of $Cum % of $ value
Cum % of units
Class
1 Water pump
$ 1500 49.2% 49.2% 5.9% A
2 Oil filter $ 750 24.6% 73.8% 35.3% B
3 Timing belt
$ 500 16.4% 90.2% 41.2% C
4 Oil quart $ 300 9.8% 100.0% 100.0% D
Totals $ 3050 100.0%