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.
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.