ABC analyses INTRODUCTION:

In any inventory, which contains more than one stockeditem, some items, will be more important to organisationthan others. Some items might have a very high usage rate, soif they ran out many customers would be disappointed.Other items might be of particularly high value, soexcessively high inventory levels would be particularlyexpensive. One common way of discriminating betweendifferent stock items is to rank them by the value of theirusage. Items with a particular high value of usage aredeemed to warrant careful control, whereas those with lowusage values need not be controlled quite so rigorously.

LITERATURE SURVEY Maintaining inventory through counting, placing orders,receiving stock, and so on takes personnel time and costsmoney. When there arc limits on these resources, the logicalmove is to try to use the available resources to controlinventory in the most efficient way; to achieve this, an ABCanalysis is one way to control the inventory effectively. ABCanalysis is based on the Pareto principle, after thenineteenth-century Italian philosopher who illustratedgraphically the fact a small proportion of the populationowned that most of the wealth in Italy. It is sometimes cal ledthe 80:20 rule, as 20% of the population owned 80% of thewealth.

In the context of an inventory system this suggests that there area few items which contribute most of the inventory costs and alarge number of items whose costs are relatively low. This isalso known as the 80-20 phenomenon , asapproximately 20 percent of items contribute 80 percent of thecost and the remaining 80 percent of items account for only20 percent of costs. Obviously, it is important to maintaintight controls on the 20% and moderate controls on the rest,in other words, it means that 80% of inventory items need20% of the attention, while the remaining 20% of items need80% of the attention , Thus controlling the cost of only afew items will contribute to effective control of a largeamount of cosls; clerical costs are reduced and inventory costswill be well-controlled . Therefore, ABC analysis is auseful and appropriate technique for classifying inventoryitems according to the importance of their contribution to theannual cost of the entire inventory system. Inventory hasbeen divided into the following categories

A items are expensive = 70-80% of total cost or value of allitems (10-20% of all items) and requiring special care.

B items arc ordinary = 15-20% of total cost of all items(20-40% of all items)and requiring standard care.C items are cheap = 5-10% of total cost of alt items (40-70% of all items) and require little careThe ABC" method can be used for material, purchased parts,subassemblies, component parts, or products, depending onwhat form of inventory the company usually carries. Theprocedure for an ABC analysis starts by taking each itemand multiplying the number of units used in a year by the unitcost. This gives the total annual use of items in terms ofusage value. If the items are listed in order of decreasingannual usage by value, A items will be at the top of the listand C items will be at the bottom of the list. The unit cost ofan item is not the sole determinant of the classification.

XYZ analysisArticles, which are sold very regularly and in to some

extent constant numbers of items (e.g. Bulbs), are calledX-articles, while the Z-class contains such articles,whose sales runs very irregularly or even stochastically(like e.g. Spare parts). Sometimes the XYZ analysis iscalled also RSU analysis, with R for regular, S for and Ufor irregular.

Classes become summarized as follows:• X constant consumption, fluctuations are rather rare• Y stronger fluctuations in consumption, usually for trend- moderate or seasonal reasons

• Z completely irregular consumptionXYZ analysis is one of the basic supply chain

techniques, often used to determine the inventoryvaluation inside a stores. It's also strategic as it intendsto enable the Inventory manager in exercising maximumcontrol over the highest stocked item , in terms of stockvalue.A system of categorization, with similarities to Paretoanalysis, the method usually categorizes inventory intothree bands with each band having a differentmanagement control associated. Although differentcriteria may be applied to each category the typicalmethod of “scoring” an inventory item is that of annualstock value of said item (qty in stock X cost of item) withthe result thenranked and then scored (X, Y or Z).

Bandings may be specific to the industry but typically follow a 70%, 90%, 100%banding in that X class items represent 70% of the stock value (although they mayaccount for 20% number wise), Y class items fall between 70% and 90% of theannual stock value with C class the remaining. In practical terms the complex highcost materials typically fall into the X class items, with the consumable, low cost(and typically fast moving) classed as X class.

Not all stock is equally valuable and therefore doesn’t require the samemanagement focus. The results of the XYZ analysis provide information that helpsevaluate how each inventory part should be monitored and controlled. Thesecontrols are typically:

X class items which are critically important and require close monitoring and tight

control – while this may account for large value these will typically comprise a smallpercentage of the overall inventory count.

Y class are of lower criticality requiring standard controls and periodic reviews of

usage. Z class require the least controls, are sometimes issues as “free stock” or

forwardholding.