ABC & XYZ ANALYSISAhmed Atif, MMS(Operations)

Inventory ManagementDefinition: The planning and controlling of inventories in order to meet the competitive priorities of the organization Effective Inventory Management is essential for realizing the full potential of any Value Chain Inventories are important to all types of organizations and their employees and affect everyday operations because they must be counted, paid for, used in operations, used to satisfy customers and managed

Pressures of High and Low InventoryIf some critical inventories are not detained, there could be an administrative delay. On the other hand, detaining inventories for a prompt availability can entail, in case of expensive and rarely used parts, high inventory holding costs. Our aim is to find the right compromise between the two which is more economic.

Selective Control- Control by ExceptionUniform treatment of all items gives diffused effect and is also expensive Various methods of classification are available. These are: ABC- Emphasizes annual usage of materials XYZ- Emphasizes on inventory Value VED- Emphasizes criticality of the part HML-Utilizes price criterion FSN- Utilizes consumption pattern SDE- Relies on problems faced in procurement

Classification of inventoriesTechniqueABC (always better control)

BasisValue of Conception

Main UseTo control raw materials, components and WIP inventories in the normal course of business Mainly to control purchase To review the inventories and their uses at scheduled intervals To determine the stocking level of spare parts To control Obsolescence Lead time analysis and purchasing analysis Procurement/holding strategies for seasonal items

HML (high, medium, low) XYZ VED (Vital, essential, desirable) FSN (Fast moving, slow moving, non moving) SDE (Scarce, difficult, easy to obtain) SOS (seasonal, off seasonal)

Unit price of the material Value of the items in storage Criticality of the component Consumption of pattern of the components Problems faced in procurement Nature of supplies

ABC Analysis

Items held in inventory are not of equal importance in terms of Rupees invested, profit potential, sales or usage volumes or stock out penalties. The ABC approach classifies inventory items according to the measure of importance, usually annual $/Rupee usage (value multiplied by usage rate, and then allocates control efforts accordingly

A --------Very Important B ---------Moderately Important C ---------Least Important The actual number of categories may vary from org. to org.,

Attention/Control

A Category B Category C Category

A items should receive close attention through frequent reviews of amounts on hand and control over withdrawals where possible, to make sure that customer service levels are attained C items should receive loose control (2 bin system, bulk order etc) B items should be between A and C

Statistics reveal that just a handful of items account for bulk of the annual expenditure on materials

A- 5 to 10% of the items account for 70-75% 0f the total money spent on materials B- 10 to15% of total items represent 10-15% of total expenditure C- 70 to 80% of the items represent 5-10% of total expenditure

A N N U A L R U P E E V O L U M E

A Items

HIGH

A Items

Aspect Ratio Test B Items(Should appear circular)

LOW FEW

C Items

16x9

NUMBER OF ITEMS

MANY

Other Uses of ABCUsed by managers in many different settings to improve operations. One key way occurs in customer service where a manager can focus attention on the most important aspect of customer service by categorizing different aspects of customer service as very important, important or of only minor importance

ExampleTable on the next slide gives the description, annual consumption, and price per unit of 20 items in the inventory of a Chemical company.

Item Description

Annual Consumption

Cost per unit (Rs)

Item Description

Annual Consumption

Cost per unit (Rs)

Nitric Acid Xylene Drums Paraffin wax Biolac Methylene Chloride Ethyl A D spent Handrast Castor OIL

4000 600 2000 3500 50 6000 2400 4200 50 100

10/lit 10/kg 16/No 1/kg 8/kg 6/kg 5/kg 1/lit 10/kg 7/kg

Camphor Easter gum Amyl A Cartons Linseed Oil Talc Powder Red Oxide Toulene Butyl Acetate Alstat

80 50 20 2000 30 80 200 750 350 20

40/kg 8/kg 10/kg 0.15/pc 6/kg 0.25/kg 0.5/kg 4/kg 6/kg 10/kg

Step 1Determine the annual usage of each item for the past one year Annual Usage=Annual consumption X Price per unit (Rs) (Units) (Rs)

Item Description

Annual Consumption

Cost per unit (Rs) 10/lit 10/kg 16/No 1/kg 8/kg 6/kg 5/kg 1/lit 10/kg 7/kg

Annual Usage (Rs)

Item Description

Annual Consumption

Cost per unit (Rs)

Nitric Acid Xylene Drums Paraffin wax Biolac Methylene Chloride Ethyl A D spent Handrast Castor OIL

4000 600 2000 3500 50 6000 2400 4200 50 100

40000 6000 32000 3500 400 36000 12000 4200 500 700

Camphor Easter gum Amyl A Cartons Linseed Oil Talc Powder Red Oxide Toulene Butyl Acetate Alstat

80 50 20 2000 30 80 200 750 350 20

40/kg 8/kg 10/kg 0.15/pc 6/kg 0.25/kg 0.5/kg 4/kg 6/kg 10/kg

3200 400 200 300 180 20 100 3000 2100 200

Step 2Rank from 1 to 20 each material according to the amount of annual usage- 1 being assigned to the material with highest cost, 20 being least

Item Description

Annual Usage (Rs)

Rank

Item Description

Annual Usage (Rs)

Rank

Nitric Acid Xylene Drums Paraffin wax Biolac Methylene Chloride Ethyl A D spent Handrast Castor OIL

40000 6000 32000 3500 400 36000 12000 4200 500 700

1 5 3 7 13 2 4 6 12 11

Camphor Easter gum Amyl A Cartons Linseed Oil Talc Powder Red Oxide Toulene Alstat

3200 400 200 300 180 20 100 3000 200

8 14 16 15 18 20 19 9 10 17

Butyl Acetate 2100

Step 3

Arrange in Ascending order of their rank

Item Description

Annual Usage (Rs)

Rank

Nitric Acid Methylene Chloride Drums Ethyl A Xylene D spent Paraffin wax Camphor Toulene Butyl Acetate

40000 36000 32000 12000 6000 4200 3500 3200 3000 2100

1 2 3 4 5 6 7 8 9 10

Item Description

Annual Usage (Rs)

Rank

Castor OIL Handrast Biolac Easter gum Cartons Amyl A Alstat Linseed Oil Red Oxide Talc Powder

700 500 400 400 300 200 200 180 100 20

11 12 13 14 15 16 17 18 19 20

Step 4Classify 70% usage- A category 20% usage- B category 10% usage- C category

AnalysisA Category items- Nitric Acid, Methylene Chloride, B Category items- Drums, Ethyl A, Xylene, Spent D C Category items- Rest all

Important ConsiderationsAll items that the company consumes should be considered together while making ABC analyses Though generally annual consumption figures are considered for ABC analysis, yet it is not necessary Though classification of items into 3 categories A, B, C is adequate for control, yet if required the items can be classified into more than 3 categories like A, B, C1, C2, C3 etc. Combinations of two techniques also possible. Eg ABC and VED, ABC and XYZ

XYZ analysisIt is based on the value of inventory stored. X items are with high and Z are those whose inventory stock are low. Y are those which have moderate inventory stocks. Helps identifying items for which huge amount is locked up in stock and hence can be reduced. XYZ can be combined with ABC analysis as given belowClass of items X A Efforts to be made to reduce stocks to Z Efforts to convert into Z category B Efforts to be made for reducing upto Y Stocks level may be reviewed twice a year C Steps to be taken for disposing surplus stocks Control may be further tightened -

Y Z

THANK YOUAny questions?