Practical ways to consider that should be incorporated into the implementation of inventory decisions

1. Practical considerations that should be incorporated into the implementation of
inventory decisions:
ABC Analysis
Prepared by: Grace Gonzales

2. What is ABC Analysis?
ABC analysis is an inventory management technique
that determines the value of inventory items based on
their importance to the business. ABC ranks items on
demand, cost and risk data, and inventory mangers
group items into classes based on those criteria. This
helps business leaders understand which products or
services are most critical to the financial success of
their organization.

3. Purpose of ABC Analysis
is to divide all of a company’s inventory items into
three groups (group A, group B, and group C) based on
the overall inventory value of the items.

4. How Is ABC Inventory Analysis Calculated?
 Conduct ABC inventory analysis by multiplying the annual sales of a
certain item by its cost. The results tell you which goods are high
priority and which yield a low profit, so you know where to focus
human and capital resources.
Use this formula for ABC inventory analysis:
(Annual number of items sold) x (Cost per item) = (Annual usage value
per product)

6. Example:
 The inventory items in the A group account for a major portion of the inventory costs of the
organization.
 The items in the B group are typically moderately priced items and represent much less in-
vestment than the A items. Thus, it may not be appropriate to spend as much time developing
optimal inventory policies for this group as with the A group since these inventory costs are
much lower.
 The items in the C group are the very low-cost items that represent very little in terms of the
total dollars invested in inventory.

7. ABC Analysis Benefits
A long list of benefits can result from applying ABC analysis to inventory management,
including:
 Increased Inventory Optimization
 Improved Inventory Forecasting
 Better Pricing
 Informed Supplier Negotiations
 Strategic Resource Allocation
 Better Customer Service
 Better Product Life Cycle Management
 Control Over High-Cost Items
 Sensible Stock Turnover Rate
 Reduced Storage Expenses
 Simplified Supply Chain Management

8. ABC Analysis Limitations
 Parameter Instability
 Limited Pattern Consideration
 Low Information Extraction
 High Resource Consumption
 Value Blindness
 System Incompatibility
 Undersupply or Oversupply Issues
 Loss Risk
 Mandatory Standardization
 Arbitrary Categorization
 Business Limitations
 High Resource Consumption

9. THANK YOU!!