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Introduction Inventory is defined as a usable resource which is physical and tangible.
What functions does inventoryperformRegularizing demand and supplyEconomising purchasesAllowing organisations to cope with perishable goodsInventory can store labor
Classification of inventory systemLot size re order pointFixed order internal scheduling policyOptional replenishment policyothers
ABC analysis ABC analysis is basic analytical management tool which enables top management to place the efforts where the result will be greatest. This technique is popularly known as always better control. The technique tries to analyze the distribution of any characteristic by money value of importance in order to determine priority.
Quite a large no. of management • 20% of the machines are responsible for 80% of problems can be downtime.successfully solved • 20% of end products generally account for 80% of total revenue. by remembering • 20% of clerks make 80% of the clerical errors. this simple 20/80 • 20% of employees create 80% of problems. law, popularly • 20% of the customers are responsible for 80% of known as preto’s bad debts.law of “ cause and • 20% of the total items in the stock account for effect”. The 80% of the total expenditure on the materials. following are few illustrations.
ABC analysis for selective control ABC analysis underlines a very important principle “vital few-trivial many”. Statistics reveals that just a handful of items account for bulk of the annual expenditure on materials. These few items are called “A” items, therefore hold the key to the business. The other items, known as B and C items, are numerous in number, but their contribution is less significant. ABC analysis thus tends to segregate all items into 3 categories: A, B, C on the basis of their annual usage.
The annual consumption analysis of any organization would indicate that a handful of top high value items- less than 10% of total no- will account for substantial portion of about 75% of the total consumption value and such vital few items are called ‘A’ items which need careful attention of the material managers. Similarly a large no. of “bottom” items- over 70% of total consumption of units are called trival many- account only for about 10% of the consumption value are known as ‘C’ class. The items which lie between the top and bottom are called ‘B’ category items.
Application of ABC analysis This application helps the materials manager to exercise selective control and focus his attention only on few items when he is confronted with lakhs of store items. Any sound stock control system should ensure that every item gets right amount of attention at the right time. ABC analysis makes it possible with considerably less efforts by its selective approach. The following are the applications of ABC analysis:
1.Degree of control: A class items form a substantial part of total consumption in rupees and so it must draw our attention. Up-to-date and accurate records should be maintained for these items. The inventory should be kept at minimum by putting blanket orders covering annual requirements and then arranging frequent deliveries from vendors. B class items should have normal or moderate control made possible by good records and regular attention. A little or no control is required for C class items. Large inventories should be maintained to avoid stock outs.m
2.Ordering procedureA class items require careful and accurate determination of orderquantities and order points based on exact requirements. They should besubjected to frequent reviews to reduce possibility of overstocking.A reasonably good analysis for order quantities and order point isrequired for B items but the stock may be reviewed less frequently.No such computations are required for C items. These items should bebought in bulk may be for full year.
3.Stock recordsDetailed records of goods reserved, received, ordered, issuedon hand need to be maintained for A category items. Tightand accurate controls are required for such items.No such detailed records are necessary for C class items.Any routine method that ensures good and accurate recordis enough for B class items.
4.Priority treatmentVIP treatment may be accorded to A items in all activities such asprocessing of purchase orders, receiving, inspection, movement on theshop floor, etc with an object to reduce lead time and average inventory.No such treatment is necessary for B items. Normal plant proceduresshould take care of inward and outward flow of these items.No priority is assigned to C items.
5.Safety stockSafety stock should be less for A items.It should be high for C itemsIt should not be too high or too low for Bitems.
6.Stores layoutA category items should be kept near issue point.B items which are less active can be put slightly furtherC items can be put in less accessible except those fewwhich have fallen in category C because of low unit priceand not because of their low consumption.
7.Value analysis To secure maximum benefits it is essential to select those items for value analysis which offer the highest scope for cost reduction. The ABC analysis is a helpful step in this direction.
Purpose of ABC analysis The object of carrying out ABC analysis is to develop policy guidelines for selective controls. Normally, once ABC analysis has been done, the following broad policy guidelines can be established in respect of each category.
A items B items C itemsHigh consumption value moderate value low value1.Very strict control moderate control Low control2. No safety stock Low safety stock High safety stock3. Frequent ordering Once in 3 weeks Once in 6 months4. Weekly control Monthly control reports Quarterly control reportsstatements5. As many sources as Two or more reliable Two reliable sources forpossible for each item sources each item6. Rigorous value analysis Moderate value analysis Minimum value analysis7. Accurate forecast in Estimate based on past Rough estimates formaterial planning data planning8. Minimisation of waste Surplus and obsolete Annual review overobsolete and surplus items surplus and obsolete materials9. Maximum efforts to Moderate efforts Minimum clerical efforts.reduce lead time
Making ABC analysis • Calculate rupee annual usage for each item in inventory. • Sort all items in descending order • Prepare a table showing cost, no. of units etc • Starting from the top compute the runningThe entire process of total.ABC analysis can be • Compute the cumulative percentage for the summarized in item count and cumulative annual issue value. following steps:
Advantages of ABC analysis By concentrating on category A items the material manager is able to control inventories and show visible results in a short span of time. By controlling the A items and doing a proper inventory analysis, obsolete stocks are automatically pinpointed.
Limitations of ABC analysisSome times even C category itemsfall in A category. Like diesel in timeof power crisis.Its very difficult to make thecalculation of that many items.