Inventory Control Models.

It is concerned with the acquisition, storage, handling of inventories so as to ensure the availability of inventory whenever needed and minimize wastage and losses. It help managers to decide reordering time, reordering level and optimal ordering quantity.

ABC analysis provides a mechanism for identifying items which will have a significant impact on overall inventory cost [1] whilst also providing a mechanism for identifying different categories of stock that will require different management and controls[2] When carrying out an ABC analysis, inventory items are valued (item cost multiplied by quantity issued/consumed in period) with the results then ranked. The results are then grouped typically into three bands[3]. These bands are called ABC codes.

ABC codes
1. "A class" inventory will typically contain items that account for 80% of total value, or 20%

of total items. 2. 3. "B class" inventory will have around 15% of total value, or 30% of total items. "C class" inventory will account for the remaining 5%, or 50% of total items.

ABC Analysis is similar to the Pareto principle in that the "A class" group will typically account for a large proportion of the overall value but a small percentage of the overall volume of inventory.[4]

PARETO ANALYSIS / ABC ANALYSIS - June 14th, 2007 Pareto analysis (sometimes referred to as the 80/20 rule and as ABC analysis) is a method of classifying items, events, or activities according to their relative importance. It is frequently used in inventory management where it is used to classify stock items into groups based on the total annual expenditure for, or total stockholding cost of, each item. Organisations can concentrate more detailed attention on the high value/important items. Pareto analysis is used to arrive at this prioritisation. Taking inventory as an example, the first step in the analysis is to identify those criteria which make a significant level of control important for any item. Two possible factors are the usage rate for an item and its unit value. Close control is more important for fast moving items with a high unit value. Conversely, for slow moving, low unit value items the cost of the stock control system may exceed the benefits to be gained and simple methods of control should be substituted. These two factors can be multiplied to give the annual requirement value (ARV) - the total value of the annual usage. If the stock items are then listed in descending order of ARV, the most important items will appear at the top of the list. If the cumulative ARV is then plotted against number of items then a graph known as a Pareto curve is obtained. The precise shape of a Pareto curve will differ for any analysis but the broad shape remains similar following 'the 80/20 rule'. Vilfredo Pareto was a 19th century economist who observed that 80% of Italy's wealth was owned by 20% of the population. In this case, typically, the first 20% of items in the list will account for approximately 80% of cumulative ARV. For a company with a stock list of 1,000 different items this means that paying more attention to the top 200 items (with a sophisticated stock control system) will give close control of about 80% of total stock investment. The next, say, 40% of items, will, typically, account for a further 15% of cumulative ARV. These can be subject to less precise control methods. The last 40% of (low value of low usage) items then account for a mere 5% of ARV and can be controlled with a simple system. The alternative term ABC analysis stems from the fact that the first 20% of important items are known as Category A items, the next, typically 40% are Category B items and the relatively unimportant, though larger in number, 40% are Category C items. Other examples Control of travel costs : again, typically, 20% of journeys will account for 80% of total travel costs - and should be closely monitored and controlled. Quality control : failure modes can be prioritised depending on their impact on a system's performance.

ABC Analysis: Items are classified according to annual usage value Very few items whose annual consumption value is large contribute significantly to the total inventory holding. There are very large no of items whose annual consumption value is small and their contribution to total inventory is negligible.

Usually 10% of the items account for 70% of the total annual usage. The next 20% of the items account for next 20% of annual usage and Remaining 70% contribute just 10% of the total annual usage. This should not be mixed with Pareto analysis where 20% effort does 80% job and balance 80 % does 20%, commonly known as 80:20 formula.