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Lecturte Logistics management - Chapter: ABC analysis

Lecturte Logistics management - Chapter: ABC analysis. At the end of this lecture, students should be able to use the ABC approach to classify the inventory into A, B and C, understand the reasons why inventory should be classified. | ABC analysis Learning outcomes At the end of this lecture, students should be able to Use the ABC approach to classify the inventory into A, B and C Understand the reasons why inventory should be classified What is ABC analysis? ABC analysis is an inventory categorization method which consists in dividing items into three categories (A, B, C): A being the most valuable items, C being the least valuable ones. This method aims to draw managers’ attention on the critical few (A-items) not on the trivial many (C-items). The Pareto principle VILFREDO PARETO (1848-1923) 20% of population owns 80% of nations wealth 20% of employees cause 80% of problems 20% of items accounts for 80% of firms expenditure The ABC analysis The ABC approach states that a company should rate items from A to C, basing its ratings on the following rules: A-items are goods which annual consumption value is the highest; the top 70-80% of the annual consumption value of the company typically accounts for only 10-20% of total inventory items. The ABC analysis The ABC approach states that a company should rate items from A to C, basing its ratings on the following rules: B-items are the interclass items, with a medium consumption value; those 15-25% of annual consumption value typically accounts for 30% of total inventory items. The ABC analysis The ABC approach states that a company should rate items from A to C, basing its ratings on the following rules: C-items are, on the contrary, items with the lowest consumption value; the lower 5% of the annual consumption value typically accounts for 50% of total inventory items. The ABC analysis The annual consumption value is calculated with the formula: (Annual demand) x (item cost per unit) Through this categorization, the supply manager can identify inventory hot spots, and separate them from the rest of the items, especially those that are numerous but not that profitable. The ABC analysis Steps for the classification of items: Find out the unit cost . | ABC analysis Learning outcomes At the end of this lecture, students should be able to Use the ABC approach to classify the inventory into A, B and C Understand the reasons why inventory should be classified What is ABC analysis? ABC analysis is an inventory categorization method which consists in dividing items into three categories (A, B, C): A being the most valuable items, C being the least valuable ones. This method aims to draw managers’ attention on the critical few (A-items) not on the trivial many (C-items). The Pareto principle VILFREDO PARETO (1848-1923) 20% of population owns 80% of nations wealth 20% of employees cause 80% of problems 20% of items accounts for 80% of firms expenditure The ABC analysis The ABC approach states that a company should rate items from A to C, basing its ratings on the following rules: A-items are goods which annual consumption value is the highest; the top 70-80% of the annual consumption value of the company typically accounts for only 10-20% .