Inventory Management
ABC Technique
The ABC analysis is an inventory categorization technique often used in material management wherein accuracy and control decreases from A to C.
Key Points
items: very tight control and accurate records;
items: less tightly controlled and good records;
items: simplest controls possible and minimal records.
- The
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
analysis suggests that inventories of an organization are not of equal value.
Key Terms
- Just in Time: Just in time (JIT) is a production strategy that strives to improve a business return on investment by reducing in-process inventory and associated carrying costs.
ITEMS: very tight control and accurate records
ITEMS: less tightly controlled and good records
ITEMS: simplest controls possible and minimal records
The analysis suggests that inventories of an organization are not of
equal value. Thus, the inventory is grouped into three categories (
,
, and
) in order of their estimated importance.
items are very important for an organization. Because of the high
value of these
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.
items are important, but of course less important, than
items and
more important than
items. Therefore,
items are intergroup items.
items are marginally important.
The following is an example of the Application of Weighed Operation
based on class in the electronics manufacturing company with
active parts.
ABC analysis Actual distribution of ABC class in the electronics manufacturing company with active parts.
Using this distribution of class and change total number of the parts to
.
ABC techniques Distribution of ABC class
- Uniform Purchase: When you apply equal purchasing policy to all
components, example weekly delivery and re-order point (safety stock) of two-week supply assuming that there are no lot size constraints, the factory will have a
delivery in four weeks and the average inventory will be
weeks supply.
- Weighed Purchase: In comparison, when weighed purchasing policy
applied based on
class, example
class monthly (every four weeks) delivery with re-order point of three-week supply,
class
-weekly delivery with re-order point of two-week supply,
class weekly delivery with re-order point of one-week supply, total number of delivery in four weeks will be
and average inventory will be
week supply.
By applying weighed control based on classification, required man hours and inventory level are drastically reduced.