ABC ANALYISIS Basmati Foods Pvt. Ltd.

By:

Piyush Jain FMG 22B 221089

ACKNOWLEDGEMENT I take this opportunity to express my profound gratitude and deep regards to my faculty Prof. ALOK KUMAR of FORE school of management for his exemplary teachings, guidance and constant encouragement throughout the course. The blessing, help and guidance given by him time to time shall carry me a long way in the journey of life on which I am about to embark.

TABLE OF CONTENTS

ABC Analysis

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Company Introduction ................................................................. ABC Analysis of AAE Conclusion ................................................................. .................................................................

ABC Analysis
In supply chain, ABC analysis is an inventory categorization method which consists in dividing items into three categories, A, B and C: A being the most valuable items, C being the least valuable ones. This method aims to draw managers attention on the critical few (A-items) and not on the trivial many (C-items).

Prioritization of the management attention

Inventory optimization is critical in order to keep costs under control within the supply chain. Yet, in order to get the most from management efforts, it is efficient to focus on items that cost most to the business. The Pareto principle states that 80% of the overall consumption value is based on only 20% of total items. In other words, demand is not evenly distributed between items: top sellers vastly outperform the rest. The ABC approach states that, when reviewing inventory, a company should rate items from A to C, basing its ratings on the following rules: A-items are goods which annual consumption value is the highest. The top 70-80% of the annual consumption value of the company typically accounts for only 10-20% of total inventory items. B-items are the interclass items, with a medium consumption value. That 15-25% of annual consumption value typically accounts for 20-30% of total inventory items. C-items are, on the contrary, items with the lowest consumption value. The lower 5% of the annual consumption value typically accounts for 50 - 70 % of total inventory items.

Inventory management policies

Policies based on ABC analysis leverage the sales imbalance outlined by the Pareto principle. This implies that each item should receive a weighed treatment corresponding to its class: A-items should have tight inventory control, more secured storage areas and better sales forecasts. Reorders should be frequent, with weekly or even daily reorder. Avoiding stockouts on A-items is a priority. Reordering C-items is made less frequently. A typically inventory policy for C-items consist of having only 1 unit on hand, and of reordering only when an actual purchase is made. This approach leads to stock-out situation after each purchase which can be an acceptable situation, as the C-items present both low demand and higher risk of excessive inventory costs. B-items benefit from an intermediate status between A and C. An important aspect of class B is the monitoring of potential evolution toward class A or, in the contrary, toward the class C.

Splitting items in A, B and C classes are relatively arbitrary. This grouping only represents a rather straightforward interpretation of the Pareto principle. In practice, sales volume is not the only metric that weighs the importance of an item. Margin but also the impact of a stock-out on the business of the client should also influence the inventory strategy. The following steps will explain to you the classification of items into A, B and C categories.

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Find out the unit cost and the usage of each material over a given period. Multiply the unit cost by the estimated annual usage to obtain the net value. List out all the items and arrange them in the descending value. (Annual Value) Accumulate value and add up number of items and calculate percentage on total inventory in value and in number. 5. Draw a curve of percentage items and percentage value. 6. Mark off from the curve the rational limits of A, B and C categories.

COMPANY INTRODUCTION
Established in the year 1949, we are manufacturers and exporters of grocery that includes dal, soyabeen, rice, etc. ABC Analysis of BFPL Limited The following snapshots of ABC analysis performed in Excel presents the list of materials whose inventory is maintained. Also they show the prioritization of the inventory materials which is the Heart of ABC analysis. Along with the details is the graphical representation of the segregation of the inventory.

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CONCLUSION Thus as visible 20% of total inventory items accounts for 70% of the annual consumption value Next 15% of the items accounts for another 12% of the annual consumption value Rest 65% of the inventory items accounts for 8% of the annual consumption value Thus the company can now optimize its inventory management activities and achieve cost reductions to a great extent.