Quản trị kinh doanh - ABC analysis

ABC analysisLearning outcomesAt the end of this lecture, students should be able toUse the ABC approach to classify the inventory into A, B and CUnderstand the reasons why inventory should be classifiedWhat is ABC analysis?ABC analysis is an inventory categorization method which consists in dividing items into three categories (A, B, 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) not on the trivial many (C-items).The Pareto principleVILFREDO PARETO (1848-1923)20% of population owns 80% of nations wealth20% of employees cause 80% of problems20% of items accounts for 80% of firms expenditureThe ABC analysisThe ABC approach states that 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.The ABC analysisThe ABC approach states that a company should rate items from A to C, basing its ratings on the following rules:B-items are the interclass items, with a medium consumption value; those 15-25% of annual consumption value typically accounts for 30% of total inventory items.The ABC analysisThe ABC approach states that a company should rate items from A to C, basing its ratings on the following rules:C-items are, on the contrary, items with the lowest consumption value; the lower 5% of the annual consumption value typically accounts for 50% of total inventory items.The ABC analysisThe annual consumption value is calculated with the formula:(Annual demand) x (item cost per unit) Through this categorization, the supply manager can identify inventory hot spots, and separate them from the rest of the items, especially those that are numerous but not that profitable.The ABC analysisSteps for the classification of items:Find out the unit cost and 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);The ABC analysisSteps for the classification of items:Accumulate value and add up number of items and calculate percentage on total inventory in value and in number;Draw a curve of percentage items and percentage value;Mark off from the curve the rational limits of A, B and C categories. (refer to the next slide)The ABC analysisABC analysisPercentage of itemsPercentage value of annual usageClass A itemsAbout 20%About 80%Close day to day controlClass B itemsAbout 30%About 15%Regular reviewClass C itemsAbout 50%About 5%Infrequent reviewExample 1Percentage of itemsPercentage value of annual usageClass A itemsAbout 20%About 80%Close day to day controlClass B itemsAbout 30%About 15%Regular reviewClass C itemsAbout 50%About 5%Infrequent reviewStep 1Calculate the total spending per yearItem numberUnit costAnnual demandTotal cost per year101548,000240,000102112,00022,000103153004,50010488006,40010574,80033,600106161,20019,2001072018,000360,00010843001,20010995,00045,000110125006,000Total usage737,900Total cost per year: Unit cost * total cost per yearStep 2Calculate the usage of item in total usageItem numberUnit costAnnual demandTotal cost per yearUsage as a % of total usage101548,000240,00032.5%102112,00022,0003%103153004,5000.6%10488006,4000.9%10574,80033,6004.6%106161,20019,2002.6%1072018,000360,00048.8%10843001,2000.2%10995,00045,0006.1%110125006,0000.8%Total usage737,900100%Usage as a % of total usage = usage of item/total usageStep 3Sort the items by usageItem numberCumulative % of itemsUnit costAnnual demandTotal cost per yearUsage as a % of total usageCumulative % of total10710%2018,000360,00048.8%48.8%10120%548,000240,00032.5%81.3%10930%95,00045,0006.1%87.4%10540%74,80033,6004.6%92%10250%112,00022,0003.0%94.9%10660%161,20019,2002.6%97.5%10470%88006,4000.9%98.4%11080%125006,0000.8%99.2%10390%153004,5000.6%99.8%108100%43001,2000.2%100%Total usage737,900100%Step 4Results of calculationCathegory Items Percentage of itemsPercentage usage (%)ActionClass A107, 10120%81.3%Close controlClass B109, 105, 102, 10630% 13.6%Regular reviewClass C106,104, 110, 103, 10850%5.1%Infrequent reviewAdditional rules for ABC analysisCathegoryPercentage of itemsPercentage of usageClass A items5-25%40-80%Class B items20–40%15-40%Class C items40-75%5-20%A ≤ B ≤ CInventory management policiesEach item should receive a 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 stock-outs on A-items is a priority.Inventory management policiesEach item should receive a treatment corresponding to its class: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.Inventory management policiesEach item should receive a treatment corresponding to its class: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. Procurement and Warehouse ApplicationsThe results of an ABC Analysis extend into a number of other inventory control and management processes:Review of stocking levels: “A” items will generally have greater impact on projected investment and purchasing spend, and therefore should be managed more aggressively in terms of minimum and maximum inventory levels; inactive items will fall to the bottom of the prioritized list; the bottom of the “C” category is the best place to start when performing a periodic obsolescence review.Procurement and Warehouse ApplicationsThe results of an ABC Analysis extend into a number of other inventory control and management processes:Cycle counting: the higher the usage, the more activity an item is likely to have; to ensure accurate record balances, higher priority items are cycle counted more frequently; “A” items are counted once every quarter; “B” items once every 6 months; and “C” items once every 12 months.Procurement and Warehouse ApplicationsThe results of an ABC Analysis extend into a number of other inventory control and management processes:Identifying items for potential consignment or vendor stocking: since “A” items tend to have a greater impact on investment, these would be the best candidates to investigate the potential for alternative stocking arrangements that would reduce investment liability and associated carrying costs.Procurement and Warehouse ApplicationsThe results of an ABC Analysis extend into a number of other inventory control and management processes:Turnover ratios and associated inventory goals: “A” items will have greater usage than “B” or “C” items, and as a result should have greater turnover ratios; when establishing investment and turnover metrics, inventory data can be segregated by ABC classification, with different targets for each category.Example 2Item numberAnnual quantity usedUnit value175802150,0000.935003.0418,0000.2053,0000.30620,0000.10710,0002Step 1Item numberAnnual quantity usedUnit valueUsage per year175806,0002150,0000,9135,00035003,01,500418,0000,203,60053,0000,30900620,0000,102,000710,000220,000Total usage169,000Step 2 Item numberAnnual quantity usedUnit valueUsage per yearPercentage in total usage (%)175806,0003.51%2150,0000.9135,00079.8%35003.01,5000.87%418,0000.203,6002.1%53,0000.309000.53%620,0000.102,0001.18%710,000220,00011.8%Total usage169,000Step 3Item numberCumulative % of itemsAnnual quantity usedUnit valueUsage per yearPercentage in total usage (%)Cumulative % of total214%150,0000.9135,00079.8%79.8%729%10,000220,00011.8%91.6%142%75806,0003.51%95.11%456%18,0000.203,6002.1%97.21%671%20,0000.102,0001.18%98.39%384%5003.01,5000.87%99.46%5100%3,0000.309000.53%100%Total usage169,000Step 4CathegoryItemsPercentage of itemsPercentage of usage (%)ActionClass A items2 15%79.8%Close controlClass B items7, 130%15.31%Regular reviewClass C items3, 4, 5, 655%4.89%Infrequent reviewConclusionThe boundary between class A and class B might not be as sharply defined;The purpose of this classification is to ensure that purchasing staff use resources to maximum efficiency by concentrating on those items that have the greatest potential savings → selective control will be more effective than an approach that treats all items identically.33Akpe na mi!