PRCH-1012

Procurement
SCM

TOPIC SPECIFIC ASSIGNMENT 4

Module 9 – Chapter 8
Quantity and Inventory
ABC Analysis

A – About 20% of items, account for 80% of dollar usage

B – About 30% of items, account for 15% of dollar usage
C – About 50% of items, account for 5% of dollar usage

Steps in making an ABC Analysis

1. Establish the item characteristics that influence the results of inventory
management.
a. This is usually annual dollar usage but may be other criteria, such as scarcity
of material.
2. Classify items into groups based on the established criteria.
3. Apply a degree of control in proportion to the importance of the group.

For simplicity, only dollar usage will be used.

The procedure for classifying by annual dollar usage is as follows.
1. Determine the annual usage for each item
2. Multiply annual usage of each item by its cost to get its total annual dollar usage.
3. List the items according to their annual dollar usage (from largest to smallest).
4. Calculate the cumulative annual dollar usage.
5. Examine the annual usage distribution and group the items into A, B and C
groups based on % of annual dollar usage.

Problem One
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A company manufactures a line of 10 items, their usage and unit costs are shown in the
following table
a) Calculate the annual $ usage for each item

Part Annual Dollar

Unit Usage Unit Cost
Number Usage
1 1100 2 2,200.00
2 600 40 24,000.00
3 100 4 400.00
4 1300 1 1,300.00
5 100 60 6,000.00
6 10 25 250.00
7 100 2 200.00
8 1500 2 3,000.00
9 200 2 400.00
10 500 1 500.00

b) List items according to their annual dollar usage (on reverse).

Part Annual Dollar

Unit Usage Unit Cost
Number Usage
2 600 40 24,000.00
5 100 60 6,000.00
8 1500 2 3,000.00
1 1100 2 2,200.00
4 1300 1 1,300.00
10 500 1 500.00
3 100 4 400.00
9 200 2 400.00
6 10 25 250.00
7 100 2 200.00

c) Calculate the cumulative annual dollar usage, and cumulative % usage

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Annual Cumulative
Part Unit Unit Cumulative
Dollar Annual Dollar % Usage
Number Usage Cost % Usage
Usage Usage

2 600 40 24,000.00 24,000.00 62.75 62.75

5 100 60 6,000.00 30,000.00 15.69 78.43
8 1500 2 3,000.00 33,000.00 7.84 86.27
1 1100 2 2,200.00 35,200.00 5.75 92.03
4 1300 1 1,300.00 36,500.00 3.40 95.42
10 500 1 500.00 37,000.00 1.31 96.73
3 100 4 400.00 37,400.00 1.05 97.78
9 200 2 400.00 37,800.00 1.05 98.82
6 10 25 250.00 38,050.00 0.65 99.48
7 100 2 200.00 38,250.00 0.52 100.00

d) Group items into A, B, C, classification

Cumulative
Part Annual Cumulative
Annual Dollar % Usage Classification
Number Dollar Usage % Usage
Usage
2 24,000.00 24,000.00 62.75 62.75 A
5 6,000.00 30,000.00 15.69 78.43 A
8 3,000.00 33,000.00 7.84 86.27 B
1 2,200.00 35,200.00 5.75 92.03 B
4 1,300.00 36,500.00 3.40 95.42 B
10 500.00 37,000.00 1.31 96.73 C
3 400.00 37,400.00 1.05 97.78 C
9 400.00 37,800.00 1.05 98.82 C
6 250.00 38,050.00 0.65 99.48 C
7 200.00 38,250.00 0.52 100.00 C

Calculation = Individual Cumulative Dollar Usage (Column 3) X 100% =

Total Cumulative Dollar Usage (column 3)

Problem Two
On a separate page perform an ABC analysis for the 10 part numbers below.
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a) Calculate the annual $ usage for each item

Part Annual Unit Annual Dollar

Number Unit Usage Cost
1 21,000
2 5,000
3 1,600
4 12,000
5 1,000 100
6 50
7 800
8 10,000
9 4,000
10 5,000
Usage
1 21,000.00
40 200,000.00
3 4,800.00
1 12,000.00
100,000.00
50 2,500.00
2 1,600.00
3 30,000.00
1 4,000.00
1 5,000.00

b) List items according to their annual dollar usage (on reverse).

Part Annual Unit Annual Dollar

Number Unit Usage Cost Usage
2 5,000 40 200,000.00
5 1,000 100 100,000.00
8 10,000 3 30,000.00
1 21,000 1 21,000.00
4 12,000 1 12,000.00
10 5,000 1 5,000.00
3 1,600 3 4,800.00
9 4,000 1 4,000.00
6 50 50 2,500.00
7 800 2 1,600.00

c) Calculate the cumulative annual dollar usage, and cumulative % usage

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Part Annual Cumulative Cumulative

% Usage
Number Dollar Usage Dollar Usage % Usage

2 200,000.00 200,000.00 52.51 52.51

5 100,000.00 300,000.00 26.25 78.76
8 30,000.00 330,000.00 7.88 86.64
1 21,000.00 351,000.00 5.51 92.15
4 12,000.00 363,000.00 3.15 95.30
10 5,000.00 368,000.00 1.31 96.61
3 4,800.00 372,800.00 1.26 97.87
9 4,000.00 376,800.00 1.05 98.92
6 2,500.00 379,300.00 0.66 99.58
7 1,600.00 380,900.00 0.42 100.00

d) Group items into A, B, C, classification

Part
Annual Cumulative Cumulative
Numbe % Usage Classification
Dollar Usage Dollar Usage % Usage
r

2 200,000.00 200,000.00 52.51 52.51 A

5 100,000.00 300,000.00 26.25 78.76 A
8 30,000.00 330,000.00 7.88 86.64 B
1 21,000.00 351,000.00 5.51 92.15 B
4 12,000.00 363,000.00 3.15 95.30 B
10 5,000.00 368,000.00 1.31 96.61 C
3 4,800.00 372,800.00 1.26 97.87 C
9 4,000.00 376,800.00 1.05 98.92 C
6 2,500.00 379,300.00 0.66 99.58 C
7 1,600.00 380,900.00 0.42 100.00 C
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Calculation = Individual Cumulative Dollar Usage (Column 3) X 100% =

Total Cumulative Dollar Usage (column 3)

Uses of ABC Classification

1. Cycle counting frequency
2. Engineering priorities
3. Procurement Priorities
4. Security
5. Replenishment systems
6. Investment decisions regarding order quantity and buffer stocks
7. Vendor Analysis