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:
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.
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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:
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
Total items 48+52+185=285
Total usage value 619.75+247+264=1,130.75
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%
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.
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