OPERATION MANAGEMENT- I

PROJECT REPORT
ON

ABC ANALYSIS

SUBMITTED TO:
PROF. ALOK KUMAR
SUBMITTED BY:
Bharat Mendiratta
FMG 23(A)
231039

TABLE OF CONTENT

S.NO

TOPIC

PAGE NO.

1.

Abstract

2.

About ABC analysis

3.

Advantages and disadvantages of

ABC analysis

4.

ABC analysis by excel

5.

Conclusion

11

6.

References

12

ABSTRACT
B.S. Auto Industries introduces itself as a one stop shop for Indian Automotive Spare Parts
including Motorcycle Parts, Motorcycle Spare Parts, Two Wheeler Spare Parts, Three Wheeler
Spare Parts and Motorcycle Accessories at the most competitive prices. The company was
incepted in 1975 to provide various products for different models of Hero Honda, Bajaj, LML
Vespa, Kinetic, TVS Suzuki, Yamaha etc. and three wheelers.
Firm wants an efficient inventory management system which can identify and predict correct
purchase schedule for different products. Thus we have suggested ABC analysis for the purpose.
Items sold by the firm:
NAME
Spark plug

PRODUCT TYPE
1

Engine oil

Piston

Valve

Clutch plate

Cam shaft

Wheel drum

Wheel rim

Mud guard

Head lights

10

Fearing

11

Seat cover

12

Kick shaft

13

Kick

14

Rocker

15

Oil seal

16

Seat

17

Silencer

18

Foot rest rod

19

Foot step

20

Handle

21

Self starter

22

CDI unit

23

Belt

24

Gear shifter

25

Unit price and annual demand of each product:

PRODUCT TYPE
1

ANNUAL DEMAND
200

UNIT PRICE
60

500

250

300

500

400

200

300

330

35

500

22

500

17

520

90

225

10

22

450

11

80

250

12

300

90

13

50

220

14

50

210

15

55

220

16

500

70

17

400

18

450

19

10

250

20

10

350

21

15

250

22

800

23

450

24

12

250

ABOUT ABC ANALYSIS

Activity Based Costing, or ABC, is a method of allocating overhead and direct expenses related
to the most important activities of the company first. This process allows business owners and
managers an opportunity to better define the areas of manufacturing or sales that generate the
most profit for the company. Inventory analyzed under the ABC method is classified in order of
profitability to the company. Class A inventory accounts for 80 percent of revenue, class B
inventory for 15 percent of revenue and class C inventory for 5 percent of revenue. ABC is
inventory tracking model for managing inventory not a demand or probabilistic model for
demand.
ABC may be USED:
When thousands of items are held in inventory by a typical organization, but only a small
% of them deserves managements closest attention and control.
ABC Analysis categorizes products according to their importance (contribution) to sales,
costs, or profits. (It is only good for multiple-product situations.)
PURPOSE:
To give more attention to those products that contribute the most in terms of %-of-profits, %- ofsales, or %-of-costs.
CLASS

% of Total Inventory

% of Sales/Costs/Profits

10-20%

60-80%

10-20%

10-20%

60-80%

5-10%

* These percentages are assumptions, NOT hard and fast rules.

CYCLE COUNTING
Cycle counting refers to inventory counting.
Different categories (A, B, and C) have different cycles (periods/times) for inventory
counting.
Category A items are counted most frequently; perhaps monthly.
Category B items less frequently; perhaps quarterly.
Category C items least frequently; perhaps once a year.
6

ADVANTAGES OF ABC ANALYSIS

1) Better Control of High-Priority Inventory:
ABC inventory analysis places tighter and more frequent controls on high-priority inventory.
High-priority inventory, or class A inventory, is the class of inventory that customers request
most often. In manufacturing, class A inventory also can include the items most often used in the
production of goods. Because Class A inventory is directly linked to the success of the company,
it is important to constantly monitor the demand for it and ensure stock levels match that
demand. With ABC analysis, your company can use its resources to prioritize control of highpriority inventory over inventory that has a lower impact on your bottom line.
2) More Efficient Cycle Counts:
Under the ABC inventory analysis method, you can allocate your resources more efficiently
during cycle counts. A cycle count is the process of counting only certain items on scheduled
dates. The frequency of your cycle counts and the items you choose to include depends on how
often your inventory fluctuates. Once inventory is organized by class, you can focus regular
cycle counts on class A inventory. Depending on your needs, it may be necessary to count class
B inventory as infrequently as twice per year and class C inventory only once per year. The ABC
analysis method saves time and labor counting only the inventory required by the cycle for the
class of inventory versus counting all inventory items each cycle.
DISADVANTAGES OF ABC ANALYSIS
1) Conflict with Other Cost Systems
The ABC inventory analysis does not meet Generally Accepted Accounting Principles (GAAP)
requirements and also conflicts with traditional costing systems. Companies that use ABC
methods must operate two costing systems, one for internal use under the ABC method and
another for compliance with GAAP.
2) Requires Substantial Resources
The ABC method requires more resources to maintain than traditional costing systems. When
cycle counts are performed, class A inventory must be routinely analyzed to determine if the
inventory still consists of high-priority items. If an inventory piece is no longer used or
demanded as frequently, it is moved to another inventory classification.

ABC ANALYSIS BY EXCEL

We are given product type, annual demand, and unit price for 25 inventory items. A spreadsheet for
this problem is shown below. In the workbook, this is Sheet 1.
1. Find Annual usage in = (annual demand)x(unit price).

2. In Sheet 2, sort the data by Annual Usage, in descending order.

3. Find Annual usage %= (annual usage of product/total annual usage)*100.
4. Find Cumulative % = (% for the current product) + (cumulative % for the previous product).
5. Classify the items as A, B, or C items.
The first five products account for 72% of annual usage and should be classified as A items.
The next six products account for about 16% of annual usage and should be B items.
The remaining products account for 12% of annual usage and should be classified as C items.

6. On the basis of cumulative % draw ABC Box graph.

10

CONCLUSION
A-products are goods whose annual consumption value is the highest; the top 60-70% of the
annual consumption value of the company typically accounts for only 10-20% of total inventory
items. Thus inventory schedule for such goods needs to be dealt with utter most care.
B-products are the interclass items, with a medium consumption value; 15-25% of annual
consumption value typically accounts for 30% of total inventory items. Thus moderate attention
is given to this class.
C- products are, on the contrary, items with the lowest consumption value; the lower 5-10% of
the annual consumption value typically accounts for 50% of total inventory items. Thus least
preference is given to this group.
For the firm:
A products: piston, engine oil, clutch plate, valve and oil seal
B products: seat cover, mud guard, fearing, cam shaft, rocker and spark plug.
C products: wheel drum, kick shaft, kick, head lights, wheel rim, self starter, handle, CDI unit,
foot step, silencer, belt, foot rest rod, seal

11

REFRENCES
http://www.hmnexports.com/
http://catalogs.indiamart.com/category/automobiles-spares.html
http://www.autoparts-india.com/

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