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ABC Analysis for Inventory

# ABC Analysis for Inventory

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# ABC Analysis for Inventory

Michael Iosua MBA 530, Dr. Foster Class of 2009

Items to be covered
1. 2. 3. 4. 5. 6. 7. 8. 9. What is ABC Analysis for Inventory? Brainstorming Activity Nuts and Bolts How ABC Analysis works A “Real World” Example ABC Analysis Exercise Summary Further Readings 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: 2. Determine the dollar volume 3. Rank items. 4. Calculate the percentage dollar volume for each item.

How does ABC analysis work? (continued)
1. Determine the cumulative percentages for number of items and dollar volume 2. 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. Sam-Mart Produce Dept.
Product Mangoes Lettuce Bananas Tomatoes Totals Pounds Sold 60 1000 500 1000 100 \$ \$ \$ \$ Cost/lb 4.00 1.00 .75 2.00 \$ Value

Step One: Determine dollar value
Product Mangoes Lettuce Bananas Tomatoes Totals Pounds Sold 650 1950 2500 900 6000 \$ \$ \$ \$ Cost/lb 4.50 .50 .60 .90 \$ \$ \$ \$ \$ \$ Value 2925.00 975.00 1500.00 810.00 6210.00

Step Two: Rank Items
Rank 1 2 3 4 Totals Product Mangoes Bananas Lettuce \$ Value \$ \$ \$ \$ 2925 1500 975 810 6210 % of \$ Cum % of \$ value Cum % of units Class

Tomatoes \$

Step Three: Calculate percentage of total dollar volume for each item
Rank 1 2 3 4 Totals Product Mangoes Bananas Lettuce \$ Value \$ \$ \$ \$ 2925 1500 975 810 6210 % of \$ 47.1% 24.2% 15.7% 13.0% 100.0% Cum % of \$ value Cum % of units Class

Tomatoes \$

Step Four: Determine cumulative percentages
Rank 1 2 3 4 Totals Product Mangoes Bananas Lettuce \$ Value \$ \$ \$ \$ 2925 1500 975 810 6210 % of \$ 47.1% 24.2% 15.7% 13.0% 100.0% Cum % of \$ value 47.1% 71.3% 87.0% 100.0% Cum % of units 10.8% 52.5% 85.0% 100.0% Class

Tomatoes \$

Step Five: Classify items
Rank 1 2 3 4 Totals Product Mangoes Bananas Lettuce \$ Value \$ \$ \$ \$ 2925 1500 975 810 6210 % of \$ 47.1% 24.2% 15.7% 13.0% 100.0% Cum % of \$ value 47.1% 71.3% 87.0% 100.0% Cum % of units 10.8% 52.5% 85.0% 100.0% Class A B C C

Tomatoes \$

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 Water Pump Timing belt Oil filter Oil quart Totals Items sold 10 10 50 100 170 Cost per item \$ \$ \$ \$ 150 50 15 3 \$ Value

Summary
• Priority on high dollar volume items • Tighter control of priority items • Not an “all purpose” method • Holds to Pareto rule

• 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.

• 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 Water Pump Timing belt Oil filter Oil quart Totals Items sold 10 10 50 100 170 Cost per item \$ \$ \$ \$ 150 50 15 3 \$ Value

Step One: Determine dollar value
Product Water Pump Timing belt Oil filter Oil quart Totals Items sold 10 10 50 100 170 Cost per item \$ \$ \$ \$ 150 50 15 3 \$ \$ \$ \$ \$ \$ Value 1500 500 750 300 3050

Step Two: Rank Items
Rank 1 2 3 4 Totals Product Water pump Oil filter Timing belt \$ Value \$ \$ \$ 1500 750 500 300 3050 % of \$ Cum % of \$ value Cum % of units Class

Oil quart \$ \$

Step Three: Calculate percentage of total dollar volume for each item
Rank 1 2 3 4 Totals Product Water pump Oil filter Timing belt \$ Value \$ \$ \$ 1500 750 500 300 3050 % of \$ 49.2% 24.6% 16.4% 9.8% 100.0% Cum % of \$ value Cum % of units Class

Oil quart \$ \$

Step Four: Determine cumulative percentages
Rank 1 2 3 4 Totals Product Water pump Oil filter Timing belt \$ Value \$ \$ \$ 1500 750 500 300 3050 % of \$ 49.2% 24.6% 16.4% 9.8% 100.0% Cum % of \$ value 49.2% 73.8% 90.2% 100.0% Cum % of units 5.9% 35.3% 41.2% 100.0% Class

Oil quart \$ \$

Step Five: Classify items
Rank 1 2 3 4 Totals Product Water pump Oil filter Timing belt \$ Value \$ \$ \$ 1500 750 500 300 3050 % of \$ 49.2% 24.6% 16.4% 9.8% 100.0% Cum % of \$ value 49.2% 73.8% 90.2% 100.0% Cum % of units 5.9% 35.3% 41.2% 100.0% Class A B C D

Oil quart \$ \$

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