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-6 University of Mumbai Sem - V
Index Introduction ABC Analysis >Example Ease Of Control >Example Graphical structure of ABC analysis Methodology VED analysis FSN analysis Page No. 4 5 6 8 11 12 14 2|Page .
Acknowledgement Foremost. I would like to express my sincere gratitude to Prof. Vijay Kapoor for providing us such useful topic which has shed light on the inner workings of the materials management department My sincere thanks also goes to my fellow members for all the support and data gathering through various sources Thank you 3|Page .
Obviously the investment for the screws is a much better value than investment for tubes. For the materials manager its specialty item TV tube is more important to plan as compared with the screws. The TV manufacturing company has TV tube as well as several screws of normal standards size. since it provides the same protection at a fraction of cost.Analysis of Inventory INTRODUCTION There are number in any organization. It is rather difficult to control so many items. 1500. Different strategies have to be used to manage them. The tube is costing Rs. They can be handled in different groups. Safety stocks almost always are a better value for low-cost items than they are for expensive ones. Safety stock of screws will cost the company few hundred while a safety stock of 30 tubes would cost thousands. For example. Each item may not be handled in same sense of importance. Here we will see some methods to analyze the inventory materials. 4|Page . or other matters. while the screws are costing Rs 2 each rather are readily available in the market. Modern inventory control system take this into account by classifying items by different attributes like value of usage.
the low-value items carry much higher safety stocks. The fact is that the “A” category items are almost one seventh as many as number of “C” category items . Sorting Of items in a group Category A B C Per cent of items 10 20 70 Per cent of value 70 20 10 Seven times as much as money is spent on items of “A” category items as on C items. which provides maximum overall protection against stock outs for a given investment in safety stocks. Example An item that costs Rs.ABC ANALYSIS The high value items have lower safety stocks because the cost of protection is high . 4000. 5 and has an annual consumption of 800 units would have a usage value of Rs. The 10 per cent that are most costly are “A” category items. 5|Page . assumes 10 per cent of items and 70 per cent of value of inventories for the most costly items.Thus the average expenditure of an “A” category item is many times greater than the average expenditure for a “C” category item . The items are separated into three groups.The following relationship is typical. while an item that costs Rs. a big percentage of the investment in inventory is concentrated on relatively few high-value items. with the maximum value volume item at the top of the list. 20000. the next 20 per cent are B category items.Investment in safety stock for the “A” item must be many times greater than for a “C” item in order to afford the same protection against stock outs.200 with a usage of only 100 units per year would have a usage value of Rs. The first step in the ABC approach is to estimate average demand for each item in inventory and multiply this figure by unit cost determine value of usage. In every case the items will account for a heavy percentage of total expenditure s and the C group will account for a surprisingly small percentage . Values of usage for each item are then listed in order of importance. In every company. The basic principles of ABC analysis is “10 percent of items hold 70 per cent of value”. and the balance items are c category items . The basis of the ”ABC” approach to inventory control.
its possible to risks fewer stock outs and reduce investments in inventories. These are distributed at random among 1000 items carried in inventory. assume that the company experiences ten serious stock-outs every year. The low value good gets les attention from material personnel. 6|Page . With ABC control. and they are equally effective in disrupting production.EASE OF CONTROL The control is better since one can be select few items. or rs 1 million. The ABC system permits selective inventory control. company ABC control with overall control proves this inventories are divided into three classes : the expensive (a) (b) (c) Example Category items account for 10 per cent item for roughly 70 per cent of value. Items for 20 per cent of the total and about 20 per cent of the value. Safty stocks are kept low for the high value items. of which 200000 is safety stock. With this order quantity and safety stock. A company stocks 1000 items in inventory and that its average investment is six weeks usage. Maintaining much higher stocks prevents stocks-outs. which should be subject to extrmly close control by the materials personnel anyway. Items for 70 per cent of the total and about 10 per cent of the value.
and seven on 700 C items. the following pattern can be expected: one stocks-out on the 100 A category items. to hold the stock-out rate to 1 per cent per annum on A category item. since C items comprise 70 per cent of total number of items in inventories. with just 20 per cent on B items and 10 per cent on A category items. Note the enormous differences in the prices paid for protection against stock-outs rs 700000 is tied up in inventory including rs 140000 in safety stock. 7|Page . However. Its breakdown are as follows: Classification of inventory in a company Category items A B C TOTAL numbers of items 104 213 810 1127 Average inventory investment Rs 142000 40100 20300 202400 Investments in safety stocks 28400 8020 4060 40480 Them stocks-out each year are distributed at random among all the 1000 items. Thus the chances of a stocks-out on an A item are the same as those for any B or C item. two on the 200 B items.Now suppose that company classifies its inventory by the ABC system. it is reasonable to expect that 70 per cent of potential stocks-outs will occur on there items. Thus under normal circumstances.
The y axis represents the value of the items in each category in percentage. of which only 8|Page . For example.where protection can he bought more cheaply. Seven times as many C category items can be protected with a total safety stock investment only one seventh of that required on the A items.57 for each C category item. Better protection against stock outs can be provided at much lower cost by concentrating investment on the cheaper items. Thus the average investment only one seventh in safety stock per A category item is rs1400 and only Rs 28.GRAPHICAL STRUCTURE OF ABC ANALYSIS The classified items if plotted on a graph they will be shown as per the graph shown below. the company might to get along with not more than two weeks average inventory of A items.
With the ABC approach the company has not only different inventory policies for the more expensive items but also different control procedures. The selective inventory management thus plays a crucial role so that we can put our limited control efforts more judiciously to the more significant group of items. In other words. In practice. a middle of the road policy would probably be followed. Depending upon the value. For the low cost items. There would be some control. since it permits substantial reductions in inventory investment. With the B items. inventory control has to be exercised selectively. on costly items. while safety stocks of C items would be doubled. it probably is not necessary to suffer any increase in stock outs of of A category items. The B items might not be changed at all. In selective management we group items in few discrete 9|Page . tight control is substituted for the protection of inventory. Because there are so few A items. leaving order quantities unchanged. It would take seven times as much efforts to maintain tight control over the 810 'C' category items as it would for the 104 'A' category items.one half week is safety stock. Therefore. criticality and usage frequency of an item we may have to decide on an appropriate type of inventory policy. and it would be possible to reduce investment in C items by only one seventh as much as the reduction in the investment for A items. it may be economic to review their inventory status almost daily to spot deviations in demand and to maintain extremely close follow up on suppliers to make certain they adhere to lead times. but the company would also rely to a greater extent on inventories to protect against stock outs than it would with the A category items. it is cheaper to carry inventory than to pay the salaries of the personnel required to keep close control. This is economic.
10 | P a g e . Such analyses are popularly known as ABC analysis. criticality and usage frequency.categories depending upon value.
This are based on very universal Pareto’s Law that in any large number we have ‘significant few’ and ‘insignificant many’. These arc the significant few. VED and FSN Analysis are also helping the material manager to do grouping to help to better control.METHODOLOGY To prepare an ABC types curve we may follow the following simple procedure: i. Annual usage value = Annual demand * Unit price. Arrange items in the descending order of the annual usage value. This type of grouping may form the starting point in introducing scientific inventory management in an organization. ii. The principle says only 20% of the items may be accounting for the 50% of the total material cost annually. Identify cut off points on the cure when there is a perceptible sudden change of slope or alternatively find cut off points at top 10% next 20% or so but do not Interpret these too literally – rather as a general indicator. 11 | P a g e . which require utmost attention.
There is no point in just controlling inventory of the items from the point of view of money blockage. They need better attention in view of production hold up.VED Analysis V = Vital items. Vital items are the most critical having extremely high opportunity cost of shortage and must be available in stock when demanded. 12 | P a g e . the cost of shortage may vary depending upon the seriousness of such a situation. But they are critical. D (desirable) categories. Essential items are quite critical with substantial cost associated with shortage and should be available in stock by and large. E = Essential items. Some of the items are in “C “category. Desirable group of items do not have serious consequences if not available when demanded but can be stocked items. VED analysis attempt to classify items into three categories depending upon the consequences of material stock out when demanded. D = Desirable items. As stated earlier. E (essential). Accordingly the items are classified into V (vital).
Even a Cclass item may be vital or an A-class item may be “Desirable”. 13 | P a g e . These are calling for a high level of service.The percent risk of shortage with “vital” group of items has to be quite small. With “Essential” category we can take a relatively higher risk of shortage and for “Desirable” category even higher.
development items Come under the slow moving category . they are not required with the same frequency .some materials are quite regularly required some others are required very occasionally and some materials may have become obsolete and might not have been demanded for years together .FSN ANALYSIS F -stands for fast moving items S -stands for slow moving items.FSN analysis groups them into three categories as: Fast moving Slow moving Non moving (dead stock) Inventory policies and models for these categories have to be different . raw-materials . In the grown up Organizations many non moving items create dead stock in the stores appropriate guidelines are required to deal with the slow moving and dead stock items 14 | P a g e .All the inventory theories have been talking about the fast – moving items .Stands for non –moving items All items do not get consumed in the same rate.these have to be managed on different basis. and N. which show regular consumption pattern many spares parts .
APHALE.ppt BOOK OF VIPUL PRAKASHAN. Analysis of inventory + .COM Logistics and scm z analysis of inventory.GOOGLE.D.BIBLIOGRAPHY WWW. 15 | P a g e . S.
GROUP MEMBERS:Ram Chandra-192 Nikunj Panchal-193 Vinay Pardeshi-194 Chintan Parekh-195 Paras Parekh-196 Divya Patel-197 16 | P a g e .
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