Download - ABC & Xyz Analysis
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 Inventory
If 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 Exception
Uniform 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 inventoriesTechnique Basis Main Use
ABC (always better control)
Value of Conception To control raw materials, components and WIP inventories in the normal course of business
HML (high, medium, low)
Unit price of the material Mainly to control purchase
XYZ Value of the items in storage
To review the inventories and their uses at scheduled intervals
VED (Vital, essential, desirable)
Criticality of the component
To determine the stocking level of spare parts
FSN (Fast moving, slow moving, non moving)
Consumption of pattern of the components
To control Obsolescence
SDE (Scarce, difficult, easy to obtain)
Problems faced in procurement
Lead time analysis and purchasing analysis
SOS (seasonal, off seasonal)
Nature of supplies Procurement/holding strategies for seasonal items
ABC Analysis
A --------Very ImportantB ---------Moderately ImportantC ---------Least Important
The actual number of categories may vary from org. to org.,
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 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
Attention/Control
A Cat-egoryB Cat-egoryC Cat-egory
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
Aspect Ratio Test
(Should appear circular)
16x9
A ItemsA Items
B Items
C Items
ANNUAL
RUPE E
VOLUME
HIGH
LOW
NUMBER OF ITEMSFEW 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
Example Table 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)
Nitric Acid 4000 10/lit
Xylene 600 10/kg
Drums 2000 16/No
Paraffin wax
3500 1/kg
Biolac 50 8/kg
Methylene Chloride
6000 6/kg
Ethyl A 2400 5/kg
D spent 4200 1/lit
Handrast 50 10/kg
Castor OIL 100 7/kg
Item Description
Annual Consumption
Cost per unit (Rs)
Camphor 80 40/kg
Easter gum
50 8/kg
Amyl A 20 10/kg
Cartons 2000 0.15/pc
Linseed Oil
30 6/kg
Talc Powder
80 0.25/kg
Red Oxide 200 0.5/kg
Toulene 750 4/kg
Butyl Acetate
350 6/kg
Alstat 20 10/kg
Step 1
Determine the annual usage of each item for the past one year
Annual Usage=Annual consumption X Price per unit
(Rs) (Units) (Rs)
Item Descriptio
n
Annual Consumpti
on
Cost per unit (Rs)
Annual Usage (Rs)
Nitric Acid
4000 10/lit 40000
Xylene 600 10/kg 6000
Drums 2000 16/No 32000
Paraffin wax
3500 1/kg 3500
Biolac 50 8/kg 400
Methylene
Chloride
6000 6/kg 36000
Ethyl A 2400 5/kg 12000
D spent 4200 1/lit 4200
Handrast
50 10/kg 500
Castor OIL
100 7/kg 700
Item Descriptio
n
Annual Consumpt
ion
Cost per unit (Rs)
Camphor
80 40/kg 3200
Easter gum
50 8/kg 400
Amyl A 20 10/kg 200
Cartons 2000 0.15/pc 300
Linseed Oil
30 6/kg 180
Talc Powder
80 0.25/kg 20
Red Oxide
200 0.5/kg 100
Toulene 750 4/kg 3000
Butyl Acetate
350 6/kg 2100
Alstat 20 10/kg 200
Step 2
Rank 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
Nitric Acid
40000 1
Xylene 6000 5
Drums 32000 3
Paraffin wax
3500 7
Biolac 400 13
Methylene Chloride
36000 2
Ethyl A 12000 4
D spent 4200 6
Handrast 500 12
Castor OIL
700 11
Item Description
Annual Usage (Rs)
Rank
Camphor 3200 8
Easter gum
400 14
Amyl A 200 16
Cartons 300 15
Linseed Oil
180 18
Talc Powder
20 20
Red Oxide 100 19
Toulene 3000 9
Butyl Acetate
2100 10
Alstat 200 17
Step 3
Arrange in Ascending order of their rank
Item Description
Annual Usage (Rs)
Rank
Nitric Acid
40000 1
Methylene Chloride
36000 2
Drums 32000 3
Ethyl A 12000 4
Xylene 6000 5
D spent 4200 6
Paraffin wax
3500 7
Camphor 3200 8
Toulene 3000 9
Butyl Acetate
2100 10
Item Description
Annual Usage (Rs)
Rank
Castor OIL 700 11
Handrast 500 12
Biolac 400 13
Easter gum
400 14
Cartons 300 15
Amyl A 200 16
Alstat 200 17
Linseed Oil
180 18
Red Oxide 100 19
Talc Powder
20 20
Step 4
Classify70% usage- A category20% usage- B category10% usage- C category
Analysis A Category items- Nitric Acid, Methylene
Chloride, B Category items- Drums, Ethyl A, Xylene,
Spent D C Category items- Rest all
Important Considerations All 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 analysis It 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 below
Class of items A B C
X Efforts to be made to reduce stocks to Z
Efforts to be made for reducing upto Y
Steps to be taken for disposing surplus stocks
Y Efforts to convert into Z category
- Control may be further tightened
Z - Stocks level may be reviewed twice a year
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THANK YOUAny questions?