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Supply Chain ManagementSEGMENTATION - ABC ANALYSIS

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ABC Analysis - Preview Objective - The need to rank inventory items in terms of importance. Conceptualized by H. Ford Dicky of General Electric (GE) in 1951. Premise of Concept- This classify items according to relative sales volume , cash flows , lead time , or stock out costs.

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ABC Analysis – Characteristics of A items

Class A Items - the important few Very few high impact items are included Require the most managerial attention and review Expect many exceptions to be made Only 20 percent of the items in the product line account for 80 percent of total sales.

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ABC Analysis – Characteristics of B items

Class B Items – the middle-share Many moderate impact items (sometimes most) Automated control w/ management by exception Rules can be used for A (but usually too many exceptions)

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ABC Analysis – Characteristics of C items

Class C Items - the trivial many Many if not most of the items that make up minor impact Control systems should be as simple as possible Reduce wasted management time and attention Group into common regions, suppliers, end users

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Performing an ABC ClassificationABC classification is relatively simple.Step 1 – Select some criterion for developing the ranking.Step 2 – Rank items in descending order of importance according to the criterion stated & to calculate actual and cumulative total revenue percentages for each item.

[This calculation will allow the items to be grouped into the ABC categories].Step 3- The last step is to assign the items into ABC groups/items.

[ The most difficult step is to assign the items into ABC groups. Based upon the discretion and importance attached to the items (subjective judgement) of the decision maker supported by the data inputs.]

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Series10

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60

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100

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0

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95100

ABC Inventory Analysis

Percentage of items in Product Line

Perc

enta

ge o

f tot

al sa

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A Items

B ItemsC Items

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ABC AnalysisSl.No. SKU ID Price (Rs.) ci Annual Demand Di

Annual (Rs.)Value ci.Di

1 5487J 2.25 260 5 85.00

2 3K68 2.85 43 122.55

3 88550 1.50 21 31.50

4 Q002 0.77 388 298.76

5 2M993 4.45 612 2 ,723.40

6 3HHT8 6.10 220 1 ,342.00

7 56M4 3.10 110 341.00

8 89KE 1.32 786 1 ,037.52

9 45O3 12.80 14 179.20

10 55K2 24.99 334 8 ,346.66

11 978SD3 7.75 24 186.00

12 78HJQ2 0.68 77 52.36

13 23LK 0.25 56 14.00

14 990RT 3.89 89 346.21

15 58JH4 7.70 675 5 ,197.50

16 2340P 6.22 66 410.52

17 3784 0.85 148 125.80

18 38JQ2 0.77 690 531.30

19 56TT7 1.23 52 63.96

20 7UJS2 4.05 12 48.60

4,677 Rs.21,983.84

1. Identify the SKUs that management should spend time on2. Prioritize SKUs by their value to firm3. Create logical groupings4. Adjust as needed

Example:• Sample of 20 SKUs• Total of 4,677 units

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Sl.No. SKU ID Price (Rs.) ci Annual Demand Di

Annual (Rs.)Value ci.Di

Cum Rs.Value ∑ci.Di

Percent AnnualRs. Value

1 55K2 24.99 334 8 ,346.66 8 ,347 38%2 58JH4 7.70 675 5 ,197.50 13,544 62%3 2M993 4.45 612 2 ,723.40 16,268 74%

4 3HHT8 6.10 220 1 ,342.00 17,610 80%

5 89KE 1.32 786 1 ,037.52 18,647 85%

6 5487J 2.25 260 5 85.00 19,232 87%

7 38JQ2 0.77 690 531.30 19,763 90%

8 2340P 6.22 66 410.52 20,174 92%

9 990RT 3.89 89 346.21 20,520 93%

10 56M4 3.10 110 341.00 20,861 95%

11 Q002 0.77 388 298.76 21,160 96%

12 978SD3 7.75 24 186.00 21,346 97%

13 45O3 12.80 14 179.20 21,525 98%

14 3784 0.85 148 125.80 21,651 98%

15 3K68 2.85 43 122.55 21,773 99%

16 56TT7 1.23 52 63.96 21,837 99%

17 78HJQ2 0.68 77 52.36 21,890 100%

18 7UJS2 4.05 12 48.60 21,938 100%

19 88550 1.50 21 31.50 21,970 100%

20 23LK 0.25 56 14.00 21,984 100%

4,677 21,983.84

ABC Analysis

} A Items:80% of Value20% of SKUs

} B Items:15% of Value30% of SKUs

} C Items:5% of Value50% of SKUs

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5% 10% 15% 20% 25% 30% 35% 40% 45% 50% 55% 60% 65% 70% 75% 80% 85% 90% 95% 100%0

20

40

60

80

100

120

38

62

7480

85 8790 92 93 95 96 97 98 98 99 99 100 100 100 100

Distribution by Value

Perc

ent o

f Ann

ual V

alue

C Items

A Items

B Items

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Illustration of ABC Analysis Item

CodeAnnual

Revenue (Rs.)

Percentage of Annual Revenue

Cumulative Revenue

Percentages Items

Classification Category

66 T 6,800 68% 68% 10% A78 R 1,200 12% 80% 20% A68 O 500 5% 85% 30% B89 E 400 4% 89% 40% B15 U 200 2% 91% 50% B32 A 200 2% 93% 60% B31 B 200 2% 95% 70% B81 Q 200 2% 97% 80% C98 K 150 1.5% 98.5% 90% C70 W 150 1.5% 100% 100% C

Rs. 10,000 100%

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Let’s SummarizeABC analysis is a useful tool to improve the effectiveness of inventory management.‘A’ item costs approximately 60-80% of the total cost of inventory while they are less in number.‘B’ items cost 20- 30 % of the total cost of inventory while they are less in number.‘C’ class items are greater in number and carry less than 10 percent of the total inventory. It is the financial evaluation for ranking and comparison of inventories.

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Questions, Comments, Suggestions?