The ABC classification- Example and analysis

LOGISTICS PROJECT OCTOBER 2017
LODZ UNIVERSITY OF TECHNOLOGY
ABC CLASSIFICATION:
How to reduce the cost of the jacket
-By Eleni Neromylioti

Problem
The product of this ABC classification is a jacket which is made by a small-medium
company. Our object is to generate savings and reduce its cost of production. For
that reason, we will define the cost of every component/material of this product.
Introduction
This table consists of 5 columns (No for number of each component, components
for the name of each, value for the cost of each, share for the percentage of the
cost of each component in the total price and the cumulated share ) and 21 rows
for the elements. Furthermore, ee will analyze the most important components of
this table which are the first five ( Group A) and some of the Group B.

Elements:
As we see above, our jacket consists of 21 elements. So we need to collect many
elements to have a good quality of leather jackets. The cost for now is 139,884
pln.

ABC Grouping:
All those elements are separated in 3 individual groups. The groups are divided in
this way:
GROUPS CUMULATIVE SHARE
A < 80%
B >80%- <98%
C >98%
• Group A: (Vital Area)
The vital area consists of 5 components like the material, the lining, the metal
zipper, some fur elements and some extra leather elements. Those elements
constitute only the 23% of the components and the 75,71% of the final price of
the product.
• Group B:(Undecided Area)
The undecided area consists of 6 components: the patches for the back, zip
fastener, buttons, silicon glue,the box and the twines. All those share a 28,57%
of the elements and 21,45% of the total price.
• Group C: (Trivial Area)
The trivial area consists of 10 elements as packing paper, nap into the pocket,
hanging strap, price tag, box stickers, yellow thread, blue thread, material
inside the pockets, price tags rope and ink. All those 10 elements constitute
the rest 47,61% of all the materials and only the 2,84% of the total price of the
jacket.

The Analysis
• Analysis for group A
-Material:
The material is the most basic component of this jacket so it is something that
cannot change easily as our customers are used to this material or to similar
ones.
Alternative options: 1. Discuss on the price with the supplier, 2. Change the
material.
The material is the most important factor for the quality of the jacket, so it is
difficult to replace it since quality is the first thing that customers want in their
products. So, negotiating about a lower price for bigger quantity of material
would be perfect.
Ex. 5%-10% discount for buying more material (bigger storage) = savings from
1,535 pln to 3,70 pln!
-Lining:
Lining is as basic factor as the material. That's why best solution between the
two (2) alternative options (1. Discuss on the price with the supplier, 2. Change
the material. ) we choose to discuss about the price with our current supplier.
Ex. 10% discount = savings of 2,94 pln /product.
-Metal Zipper:
The zipper for a jacket is a really important element. It is used many times by
the customer/user per day. It means that our zipper needs to be good quality.

Alternative options: 1. Change material –to plastic, 2. Change material –to
nylon coil, 3. Change to "invisible" type of zippers
If we choose the first or the second option, we can reduce the cost for almost
20% = savings of 4,06 pln / product. And for the third option we can reduce the
cost for 12 % = savings of 2,436 pln/ product.
So we prefer alternative No.1 and No.2 !
-Fur elements:
We use fur elements inside the collar of the jacket and inside the sleeves. It's
more a decorating/seasonal/fashion trend element and not as basic as the
others. In that way, we don’t need to use the fur for all the seasons because
fashion trends change. So, we can't negotiate for many things.
• Analysis for group B
In this group of contents, the most important are the patches and the boxes.
-Patches:
The patches are a latest fashion trend that decorate many clothes. As a fashion
trend that someday will fade away, we cannot make a long-term deals or ask
for more product for a lower price.
Alternative options: 1. Cancel usage of patches, 2. Change supplier.
In this case, the first option can affect the satisfaction/desirability of our
customers which is also not the best solution to our problem. The second
option can make some quality changes to the product. Between those two
options the first would be better, because quality matters most in this
company. Savings of 11,3 pln /product.
-Boxes:

The boxes that we use to transfer the products are important for the
good/convenient transportation of our clothes to the stores.
Alternative options: 1. Lower price for more products (bigger storage), 2.
Storage more products in one box.
Boxes is the only sure thing/component used for every product that has to be
delivered. So, making a big storage of boxes would be a wise solution in
reducing the price of the jacket. Negotiating for a discount of 10-15% for some
extra boxes will save us some little amount of money(0,3 pln).
CONCLUSIONS
If we reduce the cost of at least three elements of cost production may cause
the reduction of production cost by 10,7 pln (7,6% of the total price). In that
way, our new price of the product will be 139,884-10,7= 129,184. To reduce
the price for 10,7 pln we have to be careful in our negotiations because the
items that we talk about, have to be high qualified.
In case we want to reduce the price more we can widen the storage boxes and
also, we can stop using patches as they are only some decorating details. For
that reasons, we can reduce some extra cost 11,6 pln (8,2%). In that case, the
price shapes up to 117,584 pln.
Decisions
• Negotiate price with our current supplier for buying more material.
• Discuss about the price with our current supplier for the lining.
• Replace the metal zipper with a high-quality plastic or nylon coil one.
• Cancel using patches
• Buy more boxes from the supplier for less price.

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