3.3. ABC Analysis

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ABC ANALYSIS

ABC analysis is a basic technique of material management


ABC analysis is parato’s 80-20 rule it comes in selective management control.
Items of inventory can be classified into A-B-C.
The degree and characteristics of control depends upon.
 The necessity of control
 The relative necessity of the material to be placed under control.
 The particular characteristics of the material.
Always best control is based on the relative importance of the product\material.
The basis for ABC classification:-
1. Material price
2. Material criticality
3. Availability status of materials.
4. Material’s physical characteristics such as size weight.
5. Frequency of material usage etc.
Conventionaly,the basis for ABC analysis for ABC analysis's
‘annual consumption value' of material.
(it is not concern with unit price of material)
For e.g.(1)unit cost of an item is Rs 1000\-
no of consumption is 3 units
so consumption value = 3x1000=3000
It is observed that very large no. of items of inventory
accounts for a small portion of the annual turn over or value
of the materials.
There are many items contributing very little to the ultimate
problem of managing the working capital investment…..
Are categorized as c class items
High annual turnover items are ‘A’ class items and in between
items are ‘B’ class items.
Procedure for ABC Analysis
 List out all the materials used in the
organization-inclusive of manufacturing
product or indirect materials.
 Work out their annual consumption value
which is given by
No. of units used in an year X Unit price
 Arrange all of the items in the descending
order of their annual consumption value
 Add all consumption costs and get the total
annual inventory cost.
 Write the cumulative consumption value to total
inventory value. Note down their percentage
against the item.
 Draw a line at 70% and 90%.
 All the items whose cumulative turnover ratio
Falls under 70% are A class item,
Items between 70% & 90% are B class items,
Items above 90% are C class items.
y
100

90

80

Cumula 70
-tive
Annual 60
Tern 50
Over 40
Ratio
30

20
10

0
X
10 20 30 40 50 60 70 80 90 100
Percentage of items
VED Analysis

In addition to the market value of material there is a nuisance value to


the materials..
In ABC analysis we see that annual consumption value; quality of
material consumed and unit cost plays a vital role.
The VED analysis deals with criticality of the material or nuisance value.
The nuisance value the cost associated with material due to their
absence.
Some of the material are important by their absence and not merely by
there presence. in case of unavailability the whole production system
may come to stand still and in involve high cost of loss of production.
Here he cost of the item is not the question but the availability is the
matter.
Depending on the criticality i.e. on the functional basis. The degree can
be started –vital,essential,desirable.
Combination of ABC and VED
 ABC analysis depends on consumption value.
 VED analysis depends on criticality of time.
 When both are applied they can be used in 9 ways.
Vital, Essential, Desirable
V E D V E D
A AV AE AD A 90% 80% 70%
B BV BE BD B 95% 85% 75%
C CV CE CD C 99% 90% 80%
ABC-VED Classification Matrix ABC-VED Classification
Matrix showing Service Level
 If an item belong to V&A class, it is costlier
(more annual consumption) at the same time
higher criticality.
 The management should see that it is available
as the need arises.
Fast moving, Slow moving, Non-moving
FSN Analysis
The analysis relates to the demand for the materials
and stock moving pattern.

Fast moving materials are to be stocked nearer to the


store keeper and slow moving material are stocked at
a considerable distance and non moving materials are
stocked at a place without causing inconvenience to
day to day movement of men and materials.
Similarly, fast moving materials must be kept at a
place at which storekeeper can easily reach.
Non moving materials are to be kept at a remote
place.

This analysis will help for the optimum utilization


of available space and material handling time of the
storekeeper.
Apart from this perishable or obsolescence are used
particularly for chemicals & drugs which has low
shelf life. Here classification is made on the basis of
long, medium or short shelf life.

Some times bulky, medium bulky and non-bulky


materials are classified under XYZ classification.
Reorder level/point
The concept of reorder level is related with lead time demand.
The demand can never be accurately projected over the lead
time.
Once the demand is lead time is know the reorder level can be
easily determined.
Reorder level = lead time demand +safety stock
Since replenishment is the dynamic and changes occur all the
time.
Therefore reorder level,safty stock and reorder quality should be
regularity received.
The same values for any system should not be used for long
periods of time.
Types of inventory
Inventory consists of viable but idle resource such as men,
machine,material,and money..
Inventory may be classified as:-
1. Raw material inventory:-it is used in manufacturing it s
processed and add some value to it for making finished
goods.
2. Semi finished goods:-when the material being processed, it
may have to wait between two process.
3. Component:-the parts used in assembly of products
4. Spare parts assembly:-in case of brake down, work out parts
are to be replaced by spare parts.
5. Obsolete inventory:-when facility become useless and
removed as obsolete.
6. Waste scrape reject:-while processing chips are produced,
material which can be used in any way.
SDE Analysis

Scarce, Difficult and Easily Available Items.


Scarce items are like natural resources eg.
Uranium, oil etc
Difficult items are not easily available eg.
Blood, Spare parts etc
Easily items

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