production management - abc inventory

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The ABC Classification

What is ABC Classification ?

ABC Classification is ..a method for classifying inventory according to several criteria

including its dollar value to the firm.separates the most significant items from the less important. used to determine the degree and level of control used.

Typically, thousands of independent demand items are held in inventory by the company

BUTA small percentage is of such a high dollar value

to warrant close inventory control.

Copyright 2006 John Wiley & Sons, Inc. 12-4

Classification of inventory items

• Class A 5 – 15 % of units 70 – 80 % of value

• Class B 30 % of units 15 % of value

• Class C 50 – 60 % of units 5 – 10 % of value

THE HIGHER THE VALUE OF THE INVENTORY, THE

TIGHTER THE CONTROL.

Procedure of ABC classification

The procedure of the ABC inventory control classification is summarized in the following steps:

• Determine the annual usage for each item.• Multiply the annual usage of each item by its cost to get its total value.• List the items according to their annual money usage.• Calculate the percent of total value (Value/Total Value x100)• Calculate the percent of total quantity (Annual usage/Total Annual Usage

x 100)• Compute the cumulative percentage of items.• Examine the annual usage distribution and group the items into A, B, and C

groups based on percentage of annual usage..

ABC Classification: Example

The maintenance department for a small manufacturing firm has responsibility for maintaining an inventory of spare parts for the machinery it services. The parts

inventory, unit cost and annual usage are as follows:

ABC Classification: Example

1 $ 60 902 350 403 30 1304 80 605 30 1006 20 1807 10 1708 320 509 510 60

10 20 120

PART UNIT COST ANNUAL USAGE

ABC Classification: Example

The department manager wants to classify the inventory parts according to the ABC

system to determine which stocks of parts should most closely be monitored.

Solution:• Determine the annual usage for each item.

1 $ 60 902 350 403 30 1304 80 605 30 1006 20 1807 10 1708 320 509 510 60

10 20 120 1430 1000

PART UNIT COST ANNUAL USAGE

• Multiply the annual usage of each item by its cost to get its total value.• List the items according to their annual money usage.• Calculate the percent of total value (Value/Total Value x100)• Calculate the percent of total quantity (Annual usage/Total Annual Usage x

100)• Compute the cumulative percentage of items.

• Examine the annual usage distribution and group the items into A, B, and C groups based on percentage of annual usage..

• 1 $ 60 90• 2 350 40• 3 30 130• 4 80 60• 5 30 100• 6 20 180• 7 10 170• 8 320 50• 9 510 60• 10 20 120

• PART UNIT COST ANNUAL USAGE• TOTAL% OF TOTAL% OF TOTAL• PARTVALUE VALUE QUANTITY% CUMMULATIVE• 9 $30,600 35.9 6.0 6.0

• 8 16,000 18.7 5.0 11.0• 2 14,000 16.4 4.0 15.0• 1 5,400 6.3 9.0 24.0• 4 4,800 5.6 6.0 30.0• 3 3,900 4.6 10.0 40.0• 6 3,600 4.2 18.0 58.0• 5 3,000 3.5 13.0 71.0• 10 2,400 2.8 12.0 83.0• 7 1,700 2.0 17.0 100.0

• $85,400

AB

C

• 1 $ 60 90• 2 350 40• 3 30 130• 4 80 60• 5 30 100• 6 20 180• 7 10 170• 8 320 50• 9 510 60• 10 20 120

• PART UNIT COST ANNUAL USAGE• TOTAL % OF TOTAL % OF TOTAL• PART VALUE VALUE QUANTITY % CUMMULATIVE

• 9 $30,600 35.9 6.0 6.0• 8 16,000 18.7 5.0 11.0• 2 14,000 16.4 4.0 15.0• 1 5,400 6.3 9.0 24.0• 4 4,800 5.6 6.0 30.0• 3 3,900 4.6 10.0 40.0• 6 3,600 4.2 18.0 58.0• 5 3,000 3.5 13.0 71.0• 10 2,400 2.8 12.0 83.0• 7 1,700 2.0 17.0 100.0

• $85,400

71.0

18.6

12.5

15.0

25.0

60.0

ABC CLASSIFICATION

% OF TOTAL % OF TOTALCLASS ITEMS VALUE QUANTITY

A 9, 8, 2 71.0 15.0B 1, 4, 3 16.5 25.0C 6, 5, 10, 7 12.5 60.0