ABC Analysis for Inventory Management Essay Example

Arrange all items in descending order of value (Annual Value). 4) Calculate the total value and number of items to determine the percentage of total stock list in both value and number. 5) Plot a curve that displays the percentage of items and value. 6) Utilize the curve to identify rational bounds for A, B, and C classes.

An exemplification from eCommerce demonstrates this concept. The provided graph showcases annual sales distribution for a US-based eCommerce site in 2011. The data includes all products sold at least once and is ranked based on sales volume. Out of a total of 17,000 references, the top 2,500 products (15% of total items) generate 70% of sales. The subsequent 4,000 products (25% of total items) contribute to 20% of sales. The remaining bottom merchandise consists of10,500 products (60% of all merchandise), accounting for only10%of overall revenue.

Inventory management policies that follow ABC analysis take into account sales fluctuations as outlined bythe Pareto principle. Each item in inventory should be treated differently based on its category.A-items necessitate tight inventory control, secure storage areas, and accurate sales forecasts.Reorders for A-items should occur frequently to avoid stock-outs.C-items are reordered less often with a typical policy that maintains only one unit in stock until a purchase is made before reordering occurs.This approach, which may result in stock-out situations after each purchase, is deemed acceptable due to low demand and the risk of excessive inventory costs. The question arises for C-items as to whether they should be kept in store at all. B-items fall between A and C categories and require monitoring for potential movement towards either category. The division into A, B, and C

categories represents the Pareto principle. Sales volume alone does not determine an item's importance; margin and the impact of a stock-out on client concerns also play a role in determining the stock list strategy. The consequences of an ABC Analysis extend to various other inventory control and management procedures: 1. Carrying degrees review - Similar to investments, past results do not guarantee future performance. This text emphasizes the significance of managing "A" items more aggressively in terms of inventory levels and investment. It suggests reviewing inactive items for obsolescence, starting from the bottom of the "C" category. Additionally, it recommends conducting cycle counting more frequently for higher priority items to minimize inventory errors. The text stresses focusing on "A" items for potential shipment or vendor carrying due to their impact on investment. It provides information on identifying candidates with high inventory turnover ratios and associated goals. Furthermore, it mentions that ABC categorization can classify inventory data and set different targets for each category.
The text emphasizes the importance of the inventory turnover ratio in periodic reviews. To effectively utilize ABC categorizations, it is necessary to conduct the analysis at least once a year or more frequently if needed. Another technique mentioned is High, Medium, Low (HML) categorization which classifies items based on unit value instead of annual consumption value like ABC categorization. Management lists the items in descending order based on unit value and defines three categories: H (unit value of Rs.2000 and above), M (Rs.1000 to 2000), and L (less than Rs.1000). The HML analysis is a beneficial tool for controlling departmental consumption, frequency of physical verification, and purchase control. Unlike the ABC categorization that

takes into account consumption value, the HML analysis classifies stock lists based on their unit value.

The VED analysis is used to determine the criticality of stock lists by categorizing them as critical, essential or desirable. This assessment helps determine how an item impacts production and other services, especially in terms of spare part classification. Critical parts are given V categorization while essential parts receive E categorization and less essential parts are categorized as D items. Typically, a large stock is maintained for V items while minimal stock suffices for D items.

The SDE analysis determines item availability and is particularly useful when supply is scarce in certain situations.The SDE categorization system classifies scarce imported items as S, domestically available but hard-to-secure items as D, and easily obtainable items found in local markets as E. It is important to conduct lead time analysis and make informed purchasing decisions based on the jobs encountered in procurement.

FSN Analysis involves categorizing items as fast-moving, slow-moving, or non-moving based on their sales patterns at stores. This type of analysis is useful for managing obsolescence. To perform an FSN analysis, the date of receipt or the last day of the month of issue is used to determine the number of months that have passed since the last transaction.

FSN analysis is useful for categorizing items based on their activity level and determining whether they need to be regularly reviewed or examined further. These items are usually organized into 12-month periods. Additionally, non-moving items can also be evaluated for potential disposal.