Operations Mangement question: ABC Analysis A distributor of building supplies sells a line of designer trim to small construction companies. The line is described in the table below:...

Operations Mangement question: ABC Analysis

A distributor of building supplies sells a line of designer trim to small construction companies. The line is described in the table below:

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A) Show how this line would be classified using an ABC system.

B) Explain how this company will use the information developed from the ABC analysis.

Asked on by lkballer24

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thetall | (Level 3) Educator

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ABC analysis in operations management is used in inventory management.

To answer the first question follow the following steps:

1. Multiply the annual demand and the value per unit

2. Arrange the values from highest to lowest

3. Make a cumulative total of the number of items and the usage value

4. Get the percentages of the values in step 2 against the totals in step 3

5. Draw a graph to get the A values, B values and C values or look for group patterns because these values normally group themselves.

For example, taking the first 3 values in your table the following will occur:

Step 1

Item number 1245 will result in 48*5.5=264

Item number 2137 will result in 52*4.75=247

Item number 5879 will result in 185*3.35=619.75

Step 2

Item 5879

Item 1245

Item 2137

Step 3

Total items 48+52+185=285

Total usage value 619.75+247+264=1,130.75

Step 4

Item 5879 number of items=64.912% usage value=54.809%

Item 1245 number of items=16.842% usage value=23.347%

Item 2137 number of items=18.246% usage value=21.844%

Step 5

In this case, Item 1245 translates to a high value item and falls under category A. 16.842% of items contribute to 23.347% of the total usage value.

Item 2137 is a moderate value item and falls under category B. 18.246% of items contribute to 21.844% of the total usage value.

Item 5879 is a low value item and falls under category C. 64.912% of the total items contribute to 54.809% of the total usage value.

To answer the second question we will use the above figures

The company will use the above information to automate inventory management for category C items. While using specialized systems to manage items belonging to category A because of their importance. In some organizations the management is tasked with directly monitoring items belonging to category A.

Sources:

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