![ABC Analysis
The ABC analysis is a business term used to define an inventory categorization technique often
used in materials management. It is also known as Selective Inventory Control.
The ABC analysis provides a mechanism for identifying items that will have a significant impact
on overall inventory cost, while also providing a mechanism for identifying different categories
of stock that will require different management and controls.
The ABC analysis suggests that inventories of an organization are not of equal value. [3] Thus,
the inventory is grouped into three categories (A, B, and C) in order of their estimated
importance.
'A' items are very important for an organization. Because of the high value of these ‘A’ items,
frequent value analysis is required. In addition to that, an organization needs to choose an
appropriate order pattern (e.g. ‘Just- in- time’) to avoid excess capacity.
'B' items are important, but of course less important, than ‘A’ items and more important than
‘C’ items. Therefore ‘B’ items are intergroup items.
'C' items are marginally important.
ABC analysis categories
There are no fixed threshold for each class, different proportion can be applied based on objective and
criteria. ABC Analysis is similar to the Pareto principle in that the 'A' items will typically account for a large
proportion of the overall value but a small percentage of number of items.
Example of ABC class are
‘A’ items – 20% of the items accounts for 80% of the annual consumption value of the items.
‘B’ items - 30% of the items accounts for 15% of the annual consumption value of the items.
‘C’ items - 50% of the items accounts for 5% of the annual consumption value of the items.](https://image.slidesharecdn.com/projectreportinventory-111122113520-phpapp01/85/Project-report-inventory-9-320.jpg)
Project report inventory
- 1. Project Report On INVENTORY MANAGEMENT & MULTI ITEM JOINT REPLENISHMENT Submitted By : Aman Kumar NIshant Latika Arora Nishant Singh Nitin Nigam
- 2. Vivek Gupta Content What is inventory Why keep inventory? ABC Analysis Controlling inventory Holding costs. Purchasing cost Multi Item Joint Replenishment Advantages of Multi Item Joint Replenishment Numerical Explanation On Multi Item Joint Replenishment What is Inventory
- 3. Stock of any item or resource used in an organization (Raw Materials, Finished Products, Component parts, Supplies, and Work-in-process). Despite its importance to the supply chain, inventory is not universally well understood. It is variously characterized, both positively and negatively, as an economic asset to a non-income- producing use of capital funds. Only when considered in light of all quality, client service and economic factors—from the viewpoints of purchasing, manufacturing, sales and finance—does the whole picture of inventory become clear. No matter the viewpoint, effective inventory management is essential to supply chain competitiveness. Inventory is a list for goods and material, or those goods and materials themselves, held available in stock by a business . Inventory are held in order to manage and hide from the customer the fact that manufacture/supply delay is longer than delivery delay, and also to ease the effect of imperfections in the manufacturing process that lower production efficiencies if production capacity stands idle for lack of materials. In other words, Inventory is a quantity or store of goods that is held for some purpose or use (the term may also be used as a verb, meaning to take inventory or to count all goods held in inventory). Inventory may be kept "in- house," meaning on the premises or nearby for immediate use; or it may be held in a distant warehouse or distribution center for future use. With the exception of firms utilizing just-in- time methods, more often than not, the term "inventory" implies a stored quantity of goods that exceeds what is needed for the firm to function at the current time (e.g., within the next few hours).
- 5. WHY KEEP INVENTORY? Why would a firm hold more inventory than is currently necessary to ensure the firm's operation? The following is a list of reasons for maintaining what would appear to be "excess" inventory. MEET DEMAND. In order for a retailer to stay in business, it must have the products that the customer wants on hand when the customer wants them. If not, the retailer will have to back-order the product. If the customer can get the good from some other source, he or she may choose to do so rather than electing to allow the original retailer to meet demand later (through back-order). Hence, in many instances, if a good is not in inventory, a sale is lost forever. KEEP OPERATIONS RUNNING. A manufacturer must have certain purchased items (raw materials, components, or subassemblies) in order to manufacture its product. Running out of only one item can prevent a manufacturer from completing the production of its finished goods. Inventory between successive dependent operations also serves to decouple the dependency of the operations. A machine or work center is often dependent upon the previous operation to provide it with parts to work on. If work ceases at a work center, then all subsequent centers will shut down for lack of work. If a supply of work-in-process inventory is kept between each work center, then each machine can maintain its operations for a limited time, hopefully until operations resume the original center.
- 7. LEAD TIME. Lead time is the time that elapses between the placing of an order (either a purchase order or a production order issued to the shop or the factory floor) and actually receiving the goods ordered. If a supplier (an external firm or an internal department or plant) cannot supply the required goods on demand, then the client firm must keep an inventory of the needed goods. The longer the lead time, the larger the quantity of goods the firm must carry in inventory. A just-in-time (JIT) manufacturing firm, such as Nissan in Smyrna, Tennessee, can maintain extremely low levels of inventory. Nissan takes delivery on truck seats as many as 18 times per day. However, steel mills may have a lead time of up to three months. That means that a firm that uses steel produced at the mill must place orders at least three months in advance of their need. In order to keep their operations running in the meantime, an on-hand inventory of three months' steel requirements would be necessary. QUANTITY DISCOUNT. Often firms are given a price discount when purchasing large quantities of a good. This also frequently results in inventory in excess of what is currently needed to meet demand. However, if the discount is sufficient to offset the extra holding cost incurred as a result of the excess inventory, the decision to buy the large quantity is justified. SMOOTHING REQUIREMENTS. Sometimes inventory is used to smooth demand requirements in a market where demand is somewhat erratic. There are three basic reasons for keeping an inventory: Time - The time lags present in the supply chain, from supplier to user at every stage, requires that you maintain certain amount of inventory to use in this "lead time"
- 8. Uncertainty - Inventories are maintained as buffers to meet uncertainties in demand, supply and movements of goods. Economies of scale - Ideal condition of "one unit at a time at a place where user needs it, when he needs it" principle tends to incur lots of costs in terms of logistics. So Bulk buying, movement and storing brings in economies of scale, thus inventory.
- 9. ABC Analysis The ABC analysis is a business term used to define an inventory categorization technique often used in materials management. It is also known as Selective Inventory Control. The ABC analysis provides a mechanism for identifying items that will have a significant impact on overall inventory cost, while also providing a mechanism for identifying different categories of stock that will require different management and controls. The ABC analysis suggests that inventories of an organization are not of equal value. [3] Thus, the inventory is grouped into three categories (A, B, and C) in order of their estimated importance. 'A' items are very important for an organization. Because of the high value of these ‘A’ items, frequent value analysis is required. In addition to that, an organization needs to choose an appropriate order pattern (e.g. ‘Just- in- time’) to avoid excess capacity. 'B' items are important, but of course less important, than ‘A’ items and more important than ‘C’ items. Therefore ‘B’ items are intergroup items. 'C' items are marginally important. ABC analysis categories There are no fixed threshold for each class, different proportion can be applied based on objective and criteria. ABC Analysis is similar to the Pareto principle in that the 'A' items will typically account for a large proportion of the overall value but a small percentage of number of items. Example of ABC class are ‘A’ items – 20% of the items accounts for 80% of the annual consumption value of the items. ‘B’ items - 30% of the items accounts for 15% of the annual consumption value of the items. ‘C’ items - 50% of the items accounts for 5% of the annual consumption value of the items.
- 10. Controlling inventory Inventory management, or inventory control, is an attempt to balance inventory needs and requirements with the need to minimize costs resulting from obtaining and holding inventory. There are several schools of thought that view inventory and its function differently. These will be addressed later, but first we present a foundation to facilitate the reader's understanding of inventory and its function. Firms that carry hundreds or even thousands of different part numbers can be faced with the impossible task of monitoring the inventory levels of each part number. In order to facilitate this, many firm's use an ABC approach. ABC analysis is based on Pareto Analysis, also known as the "80/20" rule. The 80/20 comes from Pareto's finding that 20 percent of the populace possessed 80 percent of the wealth. From an inventory perspective it can restated thusly: approximately 20 percent of all inventory items represent 80 percent of inventory costs. Therefore, a firm can control 80 percent of its inventory costs by monitoring and controlling 20 percent of its inventory. But, it has to be the correct 20 percent. The top 20 percent of the firm's most costly items are termed "A" items (this should approximately represent 80 percent of total inventory costs). Items that are extremely inexpensive or have low demand are termed "C" items, with "B" items falling in between A and C items. The percentages may vary with each firm, but B items usually represent about 30 percent of the total inventory items and 15 percent of the costs. C items generally constitute 50 percent of all inventory items but only around 5 percent of the costs. By classifying each inventory item as an A, B or C the firm can determine the resources (time, effort and money) to dedicate to each item. Usually this means that the firm monitors A items
- 11. very closely but can check on B and C items on a periodic basis (for example, monthly for B items and quarterly for C items). Another control method related to the ABC concept is cycle counting. Cycle counting is used instead of the traditional "once-a-year" inventory count where firms shut down for a short period of time and physically count all inventory assets in an attempt to reconcile any possible discrepancies in their inventory records. When cycle counting is used the firm is continually taking a physical count but not of total inventory. A firm may physically count a certain section of the plant or warehouse, moving on to other sections upon completion, until the entire facility is counted. Then the process starts all over again. The firm may also choose to count all the A items, then the B items, and finally the C items. Certainly, the counting frequency will vary with the classification of each item. In other words, A item may be counted monthly, B items quarterly, and C items yearly. In addition the required accuracy of inventory records may vary according to classification, with items requiring the most accurate record keeping. Holding costs Holding costs, also called carrying costs, are the costs that result from maintaining the inventory. Inventory in excess of current demand frequently means that its holder must provide a place for its storage when not in use. This could range from a small storage area near the production line to a huge warehouse or distribution center. A storage facility requires personnel to move the inventory when needed and to keep track of what is stored and where it is stored. If the inventory is heavy or bulky, forklifts may be necessary to move it around. Storage facilities also require heating, cooling, lighting, and water. The firm must pay taxes on the inventory, and opportunity costs occur from the lost use of the funds that were spent on the inventory. Also, obsolescence, pilferage (theft), and shrinkage are problems. All of these things add cost to holding or carrying inventory.
- 12. SET-UP COSTS Set-up costs are the costs incurred from getting a machine ready to produce the desired good. In a manufacturing setting this would require the use of a skilled technician (a cost) who disassembles the tooling that is currently in use on the machine. The disassembled tooling is then taken to a tool room or tool shop for maintenance or possible repair (another cost). The technician then takes the currently needed tooling from the tool room (where it has been maintained; another cost) and brings it to the machine in question. There the technician has to assemble the tooling on the machine in the manner required for the good to be produced (this is known as a "set-up"). Then the technician has to calibrate the machine and probably will run a number of parts, that will have to be scrapped (a cost), in order to get the machine correctly calibrated and running. All the while the machine has been idle and not producing any parts (opportunity cost). As one can see, there is considerable cost involved in set-up. If the firm purchases the part or raw material, then an order cost, rather than a set-up cost, is incurred. Ordering costs include the purchasing agent's salary and travel/entertainment budget, administrative and secretarial support, office space, copiers and office supplies, forms and documents, long-distance telephone bills, and computer systems and support. Also, some firms include the cost of shipping the purchased goods in the order cost. PURCHASING COST Purchasing cost is simply the cost of the purchased item itself. If the firm purchases a part that goes into its finished product, the firm can determine its annual purchasing cost by multiplying the cost of one purchased unit (P) by the number of finished products demanded in a year (D). Hence, purchasing cost is expressed as PD.
- 13. Now total inventory cost can be expressed as: Total = Holding cost + Set-up/Order cost + Purchasing cost or Total = H(Q/2) + S(D/Q) + PD If holding costs and set-up costs were plotted as lines on a graph, the point at which they intersect (that is, the point at which they are equal) would indicate the lowest total inventory cost. Therefore, if we want to minimize total inventory cost, every time we place an order, we should order the quantity (Q) that corresponds to the point where the two values are equal. There are a number of assumptions that must be made with the use of the EOQ. These include: Only one product is involved. Deterministic demand (demand is known with certainty). Constant demand (demand is stable through-out the year). No quantity discounts. Constant costs (no price increases or inflation). While these assumptions would seem to make EOQ irrelevant for use in a realistic situation, it is relevant for items that have independent demand. This means that the demand for the item is not derived from the demand for something else (usually a parent item for which the unit in question is a component). For example, the demand for steering wheels would be derived from the demand for automobiles (dependent demand) but the demand for purses is not derived from anything else; purses have independent demand. Recent industry reports show that inventory costs as a percent of total logistics costs are increasing. Despite this rise, many organizations have not taken full advantage of ways for lowering inventory costs. There are a number of proven strategies that will provide payoff in the inventory area, both in client service and in financial terms. Some of these strategies for lowering inventory costs involve having less inventory while others involve owning less of the
- 14. inventory you have. Regardless of which techniques you employ, proactive inventory management practices will make a measurable difference in your operations. Multi Item Joint Replenishment Many studies have shown that the total cost of employing joint replenishment for correlated items is less than the total cost of using single-item replenishment. Savings increase dramatically when the demand between items is closely related. Although the benefits of joint replenishment are significant ,it is difficult to define the demand correlation among items, especially when the number of items increases. A large number of items reduces the efficiency and advantage of the multi-item inventory control. To over come this difficulty, an association clustering algorithm this paper proposes to evaluate the correlated demands among items. The proposed algorithm utilizes the support concept in association rule analysis to measure the similarity among items. Based on these measurements a clustering method is developed to group items with close demand in a hierarchal way. The can-order policy is then applied to the optimal clustering result as decided by the proposed performance index. To illustrate the benefits of the proposed association clustering algorithm for replenishment systems, a set of simulations and a sensitivity analysis is conducted. The results of the experiments show that the proposed method out performs several replenishment models. With the increasing complexity of products and services, enterprises are faced with more and more inventory items. To increase their competitive edge and satisfy the customers’ demands, an enterprise must adopt an effective multi-item inventory strategy for managing its inventory. Different researchers have applied different programming methods to solve multi-item inventory problems. People discussed a multi-item inventory system with correlated demands using the base-stock policy in discrete time and obtained bounds for the response distribution. They also investigated
- 15. optimization problem for maximizing the service level, subject to an inventory investment budget constraint. A popular management strategy for the multi-item inventory system is joint replenishment. In this context, the objective is to jointly coordinate item replenishments such that the total relevant cost can be minimized through appropriate tradeoffs between major and minor setup costs, inventory holding costs, procurement costs, and transportation costs. The savings obtained by using these policies are significant, especially when the demand between items is closely related. Joint Replenishment Model is calculated with the help of EOQ, service level and the total cost of the company. Formulas used In Multi item joint replenishment model Q = sqrt((2KD)/h) i.e quantity to be ordered K = ordering cost + item prepration Number of orders per Year = (Total demand value)/(Total order Value) Time between two orders = 1/ Number of orders per year Annual cost of ordering = Number of orders* Total cost Annual Inventory Cost = (Q/2) * Annual inventory level
- 16. Advantage of Multi Item Joint Replenishment Advantages of multi item joint replenishment model are : Reduced Shipping Cost Transportation cost is decreased to greater extent. Minimization the total relevant costs for a group of Items jointly Produced or purchased. Reduction of holding costs. Greater Discounts. Helps in Attracting customers through Discount. Question A Garment company takes different products from a major distributor. The major cost associated with it is 75$ per order, and the annual inventory percentage is 15% of the cost of items. Find the EOQ in dollar value and units for all the items. Brand Name Annual Dem Unit Cost Annual Item Prep Order Order Dem Value Quantity Quantity 1 5000 5 1000 5 986.75 197.35
- 17. 2 4000 8 500 5 789.44 98.8 3 10000 10 1000 8 1973.5 197.35 4 18000 12 1500 8 3552.35 296.06 5 1000 20 50 10 197.30 9.8 Total 38000 36 Q = sqrt(2KD/h) =7499.33 1)Number of Orders per year = Quantity Demand Value/Quantity order value = 38000/7499.33 =5.07 = 5 orders per year 2) Time Duration between two orders = 1/N = 1/5 = 0.2 years
- 18. 3) Annual Inventory cost = (Q/2) *Annual Inventory Level = 7499/2*0.15 = 562.425