SMT .N.C.GANDHI & B.V.

GANDHI MAHILA ARTS &COMMERCE COLLEGE

A presentation on ABC Analysis

Prepared by: Harshaba Gohil Roll No. : 7 Guided by: Mr.pradeep Gohil

FLOW OF PRESENTATION

1. 2. 3. 4. 5. 6. 7. 8. 9.

Definition of INVENTORY Inventory Control Techniques History of ABC analysis Introduction ABC analysis for selective control Application of ABC analysis Advantages & Disadvantages of ABC analysis Difference between A, B & C class items Steps of ABC analysis

DEFINITION:

Inventory is defined as a usable resource, which is physical, and tangible such as materials. In this sense, our stock is our inventory, but even then, the term inventory is more comprehensive. However, inventory is usable resource, it also an idle resource, unless it is managed efficiently and effectively. Thus, inventory could be raw materials, work in progress, finished products or the spare parts and other indirect materials.

INVENTORY CONTROL TECHNIQUES:

Inventory control techniques represent the operational aspect of inventory management and help in realizing the objectives of inventory management and control. Several techniques of inventory control are in use and it depends on the convenience of the firm to adopt any of the techniques.

The techniques most commonly used are the following:

1. Always Better Control (ABC) Classification 2. High, Medium and Low (HML) classification 3. Vital, Essential and Desirable (VED) Classification 4. Scarce, Difficult and Easy to obtain (SDE) 5. Fast moving, Slow moving and Non- moving (FSN) 6. Economic Order Quantity (EOQ) 7. Just In Time (JIT)

HISTORY:
The inspiration behind the ABC analysis has been drawn from Vilfredo Pareto, an Italian economist and sociologist (1842-1923), one that is most important to a student of inventory management is the concept known as Paretos Laws. Pareto arrived at the general conclusion that income distribution patterns were the same in different countries and in different historical periods. Paretos studies showed that a very small percentage of the total population always seemed to receive the bulk of the income.

ABC ANALYSIS:
Introduction : ABC Analysis is a analytical materials management tool. Fundamentally ABC Analysis may be applied to any branch of management with ease and success. It calls upon the top management to place its efforts Where the results will be the greatest. It is the selective approach popularly known as ALWAYS BETTER CONTROL (ABC). The ABC Analysis goes by its name. it always controls the best, then better and lastly the good.

ABC Analysis is a basic classification technique and a starting point of materials management. The applicability of this technique extends over almost all aspects of materials management such as parching, receiving of materials and inspection, store-keeping and issue of stores, verification of bills, inventory control, value analysis- both pre-design and prepurchase and related operation. According to kulkarni, ABC Analysis provides an important solution to the problem of scientific planning and controlling of materials.

Generally a relatively small proportion of the total items contained in an inventory will account for a large proportion of the total inventory value. This phenomenon is known as the pareto law, sometimes referred to as the 80/20 rule. It is called this because typically, 80 per cent of an operations inventory value is accounted for by only 20 per cent of all stocked item types. Although used elsewhere in operations management, the relationship can be used to classify the different types of items kept in an inventory by their usage value when it is known as ABC Analysis due to the three categories into which stock items are normally divided

ABC Analysis allows inventory managers to concentrate their efforts on controlling the more significant items of stock. Class A items are those 20 per cent or so of highvalue items which account for around 80 per cent of the total stock value. Class B items are those of medium value, usually the next 3 per cent of items which accounting for around 10 per cent of the total value. Class C items are those which, although comprising around 50 per cent of the total types of items stocked, probably only account for around 10 per cent of the total value of stocked items.

ABC ANALYSIS FOR SELECTIVE CONTROL:

ABC analysis underlines a very important principle VITAL FEW TRIVIAL MANY. Statistics reveal that just a handful of items account for bulk of the annual expenditure on materials. These few items called A items, therefore, hold the key to business. The other items, known as B and C items, are numerous in number, but their contribution is less significant.

ABC analysis thus tends to segregate all items into three categories: A, B and C based on their annual usage. The categorization so made enables one to pay the right amount of attention and minimum of effort and expenditure as merited by the item.

The annual consumption analysis of any organization would indicate that a handful of top high value items less than10percentage of the total number will account for a substantial portion of about 75% of the total consumption value and such VITAL FEW items are called A items which need careful attention of the materials managers. Similarly, a large number of bottom items that cover 70% of the total consumption of units, are called TRIVIAL MANY account only for about 10% of the consumption value, are known as C class. The items, which lie between the top and bottom, are called B category items.

: A schedule depicting the above characteristics may be drawn as given below

CLASS Number of Value of items items (% of total) (% of total) 10 70 to 90

B C

20 70

20 to 30 10 to 20

APPLICATION OF ABC ANALYSIS:

This approach helps the material manager to exercise selective control and focus his attention only on a few items when he is confronted with lacks of the stores items. Any sound strong control system should ensure that every item gets right amount of attention at the right time. ABC analysis makes it possible with considerably less effort by its selective approach.

The following are the applications of ABC analysis:

(1) Degree of control:
A class items form a substantial part of total consumption in rupees and so it must draw out attention. Up to date and accurate records should be maintained for these items. B class items should have normal or moderate control made possible by good records and regular attention. A little or no control is required for C class items. Large inventories should be maintained to avoid stock outs.

(2) Ordering procedure:

A class items require careful and accurate determination of order quantities and order points based on exact requirements. They should be subjected to frequent reviews to reduce possibility of over stocking. A reasonably good analysis for order quantities and order points is required for B class items but the stock may be reviewed less frequently or only when major changes occur, No such consumptions are required for c items. These items should be brought in bulk, may be for full year.

(3) Stock records:

Detailed records of goods reserved, received, ordered, issued and on hand need be maintained for A items. Tight, accurate controls are required for such items. No such detailed records are necessary for the C class items. Any routine method that ensures good and accurate records is enough for B class items.

(4) Priority treatment:

VIP treatment may be accorded to A items in all activities such as procession of purchase orders, receiving inspection, etc. with an object to reduce lead time and average inventory. No such treatment is necessary for B items. Normal plant procedures should take care of inward and outward flow of these items. No priority assigned to C items.

(5) Safety stock:

All the items are equally important from production point of view. Shortage of a few paisa bolts may be one of cause for stopping the production process and which may cost heavily. Shortage may occur even when accurate and realistic order points have been computed. Safety stock is provided to safeguard against these shortages. Safety stock should be less for A items. Closer forecasting can considerably cut down the possibility of stock outs. A moderate policy is required for B items. Safety stock should neither be too high or too low.

C items on the contrary, should have sufficient safety stock to eliminate progressing and reduce the cost probability of stock outs.

(6) Stores layout:

ABC analysis can be efficiently utilized for the stores layout as well. Quite a bit of time and effort can be saved, which otherwise is lost in locating the items, by depositing the fast moving items near the points of issue.

Most of these items will belong to A category. B items, which are less active, can be put slightly further. Most of C items can be put in the less accessible area except those few, which might have fallen, in C category because of their low unit price and not because of their low consumption. Such items may also be located in readily accessible areas.

(7) Value Analysis:

To secure maximum benefits it is essential to select those items for value analysis which offer the highest scope for cost reduction. The ABC Analysis is a helpful step in this direction.

ADVANTAGES OF ABC ANALYSIS:

1. It becomes possible to concentrate all efforts in areas which need genuine efforts. 2. This method produces rewarding results, at the same time it involves minimum control. 3. In respect of A category items careful attention is paid at every step, i.e., estimates of requirements, purchasing, safety stock, receipts, inspection, issues, etc. a tight and lose control is exercised. A close watch on high consumption items and their progress of replenishment, use, etc, is maintained. But C category items, which are numerous and at the same time inexpensive, are comparatively left loosely controlled.

Those items which fall under C category may be dispensed with in the record-keeping system as well. Physical division of these items into two unequal section may help in saving time, money and labour without endangering the production schedule. 5. It is the most effective and economical method as it is based on selective approach. 6. It helps in placing the orders, deciding the quantity of purchase, safety stock, etc., thus saving the enterprise from unnecessary stockouts or surpluses and their resultant consequences. 4.

1. 2. 3. 4.

5.

LIMITATIONS OF ABC ANALYSIS: ABC analysis in order to be fully effective should be carried out with standardization. ABC analysis is based on grading the items according to the importance of performance of an item, that is by vital, essential an desirable analysis. Some items though negligible in monitory value may be vital for running the plant, and constant attention is needed. The results of ABC analysis have to be reviewed periodically and updated. A C item common experience, as if diesel oil in a firm, will become the most high value item during power crisis. However, ABC analysis is a powerful approach in the direction of cost reductions it helps to control items with a selective approach.

DIFFERNCE BETWEEN A, B,& C ITEMS:

s. no. 1. 2. Management Aspect ordering Following-up and expediting Sources of supply Material planning centralisation A items frequently maximum B items quarterly some C items Half yearly In exceptional cases Two estimated Decentralised purchasing

3. 4. 5.

As many as accurate Central purchasing and storage. If possible

Two or more accurate Combination purchasing

6.

Lead time

minimum

moderate

Moderate

7. 8. 9. 10. 11. 12.

Authority Inspection Check Physical verification Postings VA/VE

Senior officers Census Close Quarterly Individual Rigorous

Middle management Sample Some Half yearly Individual Moderate

Complete delegation Sample or none Little Yearly Group Minimum

13.
14. 15. 16.

Consumption control
Safety stock Control reports Wastage and obsolescence

Very strict
Very low or Nil, if possible Weekly or Daily Minimum

Moderate
Low Monthly Moderate

Loose
Large Quarterly Moderate

STEPS OF ABC ANALYSIS:

The steps of ABC Analysis are presented below. Step 1. Input the following. Total number of items. item code, annual consumption in terms of unit and unit price for each of the items. Step 2. for each items, compute annual consumption value in terms of rupees by multiplying its annual consumption units with its price.

Step 3. arrange the items and their details in descending order of the annual consumption values computed in step 2. Step 4. compute cumulative values of the annual consumption values. Step 5. Group the items into A,B,C classes by dividing the items into 70%, 20% and 10% of the annual consumption values, respectively from top to bottom in the sorted list of step 3.

CLASSIFICATION:

10 to 15% of total items account for 70% of total consumption value. These items are A class. 10 to 20% of total items account for 20% of total consumption value. They are B class. The remaining number of the items account for the balance 15% of total consumption value. They are C class items.

Items no.

Annual consumption (units)

Value per unit (Rs.)

Annual consumption value (Rs.)

Cumulative usage (Rs.)

Cumulative usage (%)

1 2 3 4 5 6 7

100 500 200 25 25 65 50

400 60 70 200 100 20 25

40000 30000 14000 5000 2500 1300 1250

40000 70000 84000 89000 91500 92800 94050

40 70 84 89 91.5 92.8 94.05

8
9 10 11

50
30 50 20

20
30 14 30

1000
900 700 600

95050
95950 96650 97250

95.05
95.95 96.65 97.25

Items no.

Annual consumption (units)

Value per unit (Rs.)

Annual consumption value (Rs.)

Cumulative usage (Rs.)

Cumulative usage (%)

12 13 14 15 16 17 18 19 20 total

90 40 35 20 50 100 25 20 25

5 10 10 17.5 6 3 10 10 6

450 400 350 350 300 300 250 200 150 100000

97700 98100 98450 98800 99100 99400 99650 99850 100000

97.70 98.10 98.45 98.80 99.10 99.40 99.65 99.85 100.00

ANALYSIS:
Now, here total 20 items are given and they are given in their descending order so first, we have found out the annual consumption in Rs. By multiplying annual consumption in units with per unit value. Then, cumulative usage value is found out by adding annual consumption of item in cumulative usage value of previous item. But, for the first item, the annual usage value will be equal to the cumulative usage value. In third step, cumulative usage % is found out for all items and it is done by multiplying cumulative usage value of item with 100 (as total percentage is 100) and this amount is divided with total annual consumption. Thus, the cumulative usage percentage is found for each item. And last items cumulative usage % will be 100 automatically.

Sales items

Annual Unit sales price (Rs.)

Annual Rank sales order (Rs.)

Sales items

Annual Cumul sales ative usage

Cumul ative usage (%)

class

F-1 F-3 F-7 H-1 H-3 H-4 H-6 J-1 J-3 K-3

40 195 30 100 3 50 10 30 150 6

60 100 90 50 150 60 70 120 50 90

2400 19500 2700 5000 450 3000 700 3600 7500 540

7 1 6 3 10 5 8 4 2 9

F-3 J-3 H-1 J-1 H-4 F-7 F-1 H-6 K-3 H-3

19500 7500 5000 3600 3000 2700 2400 700 540 450

19500 27000 32000 35600 38600 41300 43700 44400 44940 45390

43.0 59.4 70.5 78.4 85.0 90.9 96.3 97.8 99.0 100.0

A A B B B C C C C C

Here, comes the matter of classification of the items in A, B & C. 20% of the total items, which cover about 60% of cumulative usage in Rs, will be A class items, and here, items 1 & 2 are A items. About 30% of the total items, which cover about 25% of cumulative usage, will be B class items that are 3 items are B items. About 50% of the total items, which cover about 15% of cumulative usage, are all 5 items are C items.

1. 2. 3. 4. 5. 6. 7. 8. 9.

Review of presentation: Definition of INVENTORY Inventory Control Techniques History of ABC analysis Introduction ABC analysis for selective control Application of ABC analysis Advantages & Disadvantages of ABC analysis Difference between A, B & C class items Steps of ABC analysis

REFERENCE BOOKS: 1. Production and operations management - Chunawalla patel Production and operations management - R. panneerselvam Production and operations management - Asif Haleem Materials Management - M. M. Varma

2.
3. 4.

5.

6.
7.

Material Management an integrated approch - P. Gopalkrishnan - M. sundaresan Material Management in public undertakings - Hari R. Swami production and operation Management - S. N. Charry

thanks