ABC Analysis for Inventory

Michael IosuaMBA 530, Dr. Foster

Class of 2009

Items to be covered1. What is ABC Analysis for Inventory?2. Brainstorming Activity3. Nuts and Bolts4. How ABC Analysis works5. A “Real World” Example6. ABC Analysis Exercise7. Summary8. Further Readings9. Appendix

What is ABC Analysis for Inventory?

• An inventory control system

• Categorizes by dollar volume contribution

• Valuable for small businesses

Brainstorming Exercise

• Which items contribute most to your dollar volume?

• What is your inventory control method?

• How much inventory is wasted due to lack of inventory control?

Nuts and Bolts

1. Strict control of high dollar volume items

2. Higher inventory control level

3. Leads to inventory turnover and service level increases

4. Resources are better allocated to control efforts.

Drawbacks of ABC Analysis for Inventory

• Less control over B and C, etc. items

• Not an “all-purpose” inventory control method

• Profit not necessarily maximized

How does ABC analysis work?

Steps in ABC Analysis:

1. Determine the dollar volume

2. Rank items.

3. Calculate the percentage dollar volume for each item.

How does ABC analysis work? (continued)

4. Determine the cumulative percentages for number of items and dollar volume

5. Classify items as A, B, C, etc.

A “Real World” Example

Sam-Mart Produce Department

Sam-Mart Produce Dept.

• Continually dumps produce due to spoilage

• Has difficulty keeping its stock current

• Must reduce spoilage costs

Sam-Mart Produce Dept.

Product Pounds Sold Cost/lb $ Value

Mangoes 60 $ 4.00

Lettuce 1000 $ 1.00

Bananas 500 $ .75

Tomatoes 1000 $ 2.00

Totals 100

Sam-Mart Produce Dept.

Step One: Determine dollar value

Product Pounds Sold Cost/lb $ Value

Mangoes 650 $ 4.50 $ 2925.00

Lettuce 1950 $ .50 $ 975.00

Bananas 2500 $ .60 $ 1500.00

Tomatoes 900 $ .90 $ 810.00

Totals 6000 $ 6210.00

Step Two: Rank Items

Rank Product $ Value % of $Cum % of $ value

Cum % of units

Class

1 Mangoes $ 2925

2 Bananas $ 1500

3 Lettuce $ 975

4 Tomatoes $ 810

Totals $ 6210

Step Three: Calculate percentage of total dollar volume for each item

Rank Product $ Value % of $Cum % of $ value

Cum % of units

Class

1 Mangoes $ 2925 47.1%

2 Bananas $ 1500 24.2%

3 Lettuce $ 975 15.7%

4 Tomatoes $ 810 13.0%

Totals $ 6210 100.0%

Step Four: Determine cumulative percentages

Rank Product $ Value % of $Cum % of $ value

Cum % of units

Class

1 Mangoes $ 2925 47.1% 47.1% 10.8%

2 Bananas $ 1500 24.2% 71.3% 52.5%

3 Lettuce $ 975 15.7% 87.0% 85.0%

4 Tomatoes $ 810 13.0% 100.0% 100.0%

Totals $ 6210 100.0%

Step Five: Classify items

Rank Product $ Value % of $Cum % of $ value

Cum % of units

Class

1 Mangoes $ 2925 47.1% 47.1% 10.8% A

2 Bananas $ 1500 24.2% 71.3% 52.5% B

3 Lettuce $ 975 15.7% 87.0% 85.0% C

4 Tomatoes $ 810 13.0% 100.0% 100.0% C

Totals $ 6210 100.0%

ABC Analysis Exercise

• Earnhardt Auto-Mart

• Sells water pump, timing belt, oil filter, quart of oil

• Needs to improve inventory control

Earnhardt Auto-Mart

Product Items sold Cost per item $ Value

Water Pump 10 $ 150

Timing belt 10 $ 50

Oil filter 50 $ 15

Oil quart 100 $ 3

Totals 170

Summary

• Priority on high dollar volume items

• Tighter control of priority items

• Not an “all purpose” method

• Holds to Pareto rule

Further Readings• Bhattacharya, Arijit; Sarkar, Bijan; Mukherjee, Sanat.

(2007). Distance-based consensus method for ABC analysis. International Journal of Production Research, 45(15), pp. 3405-21. Retrieved from Business Source Premier.

• Partovi, Fariborz; Hopton, Walter. THE ANALYTIC HIERARCHY PROCESS APPLIED TO TWO TYPES OF INVENTORY PROBLEMS. Production & Inventory Management Journal, 35(1), pp. 13-20. Retrieved from Business Source Premier.

Further Readings (continued)

• Flores, Benito; Whybark, D. Clay. IMPLEMENTING MULTIPLE CRITERIA ABC ANALYSIS. Engineering Costs & Production Engineering, 15(1-4), pp. 191-6. Retrieved from Business Source Premier.

Appendix

References• Fuerst, William J. SMALL BUSINESSES GET A NEW

LOOK AT ABC ANALYSIS FOR INVENTORY CONTROL. Journal of Small Business Management, 45(15), pp. 39-44. Retrieved from Business Source Premier.

• Caldwell, Bruce D. The Benefits of ABC Analysis for Inventory Reduction. The Connecticut Association of Purchasing Management, Inc. Retrieved November 20, 2007, from http://www.capminc.org/abcanalysis.htm

Earnhardt Auto-Mart

Product Items sold Cost per item $ Value

Water Pump 10 $ 150

Timing belt 10 $ 50

Oil filter 50 $ 15

Oil quart 100 $ 3

Totals 170

Step One: Determine dollar value

Product Items sold Cost per item $ Value

Water Pump 10 $ 150 $ 1500

Timing belt 10 $ 50 $ 500

Oil filter 50 $ 15 $ 750

Oil quart 100 $ 3 $ 300

Totals 170 $ 3050

Step Two: Rank Items

Rank Product $ Value % of $Cum % of $ value

Cum % of units

Class

1 Water pump

$ 1500

2 Oil filter $ 750

3 Timing belt

$ 500

4 Oil quart $ 300

Totals $ 3050

Step Three: Calculate percentage of total dollar volume for each item

Rank Product $ Value % of $Cum % of $ value

Cum % of units

Class

1 Water pump

$ 1500 49.2%

2 Oil filter $ 750 24.6%

3 Timing belt

$ 500 16.4%

4 Oil quart $ 300 9.8%

Totals $ 3050 100.0%

Step Four: Determine cumulative percentages

Rank Product $ Value % of $Cum % of $ value

Cum % of units

Class

1 Water pump

$ 1500 49.2% 49.2% 5.9%

2 Oil filter $ 750 24.6% 73.8% 35.3%

3 Timing belt

$ 500 16.4% 90.2% 41.2%

4 Oil quart $ 300 9.8% 100.0% 100.0%

Totals $ 3050 100.0%

Step Five: Classify items

Rank Product $ Value % of $Cum % of $ value

Cum % of units

Class

1 Water pump

$ 1500 49.2% 49.2% 5.9% A

2 Oil filter $ 750 24.6% 73.8% 35.3% B

3 Timing belt

$ 500 16.4% 90.2% 41.2% C

4 Oil quart $ 300 9.8% 100.0% 100.0% D

Totals $ 3050 100.0%