ABC analysis can be efficiently utilized for the stores layout as well. Quite a bit of time and effort can be saved, which otherwise is lost in locating the items, by depositing the fast moving items near the points of issue.
Most of these items will; belong to ‘A’ Category
B items which are less active can be put slightly further.
Most of C items can be put in the less accessible area except those few which might have fallen in C category because of their low unit price and not because of their low consumption. Such items may also be located in readily accessible areas.
To secure maximum benefits it is essential to select those items for value analysis which offer the highest scope for cost reduction. The ABC analysis is a helpful step in this direction.
Purpose of ABC Analysis:
The object of carrying our ABC analysis is to develop policy guidelines for selective controls. Normally, once analysis has been done, the following broad policy guidelines can be established in respect of each category.
‘A’ items merit a tightly controlled inventory system with constant attention by the purchase manager and stores management.
‘B’ items formalized inventory system with periodic attention by purchase and stores management.
‘C’ items use a simpler system designed to cause the least trouble for the purchase and stores department.
A items: High consumptions value
1) Very strict control
2) No safety stock
3) Frequent ordering
4) Weekly control statements
5) As many sources as possible for each item
6) Rigorous value analysis
7) Accurate forecast in materials planning
8) Minimization of waste obsolete and surplus
9) Maximum efforts to reduce lead time.
B items: Moderate value
1) Moderate control
2) Low safety stock
3) Once in 3 weeks
4) Monthly control reports
5) Two or more reliable sources
6) Moderate value analyses
7) Estimate based on past data on present plans
8) Quarterly control over surplus and obsolete items
9) Moderate efforts.
C items: Low consumptions value
1) Low control
2) High safety stock
3) Bulk ordering once in 6 months
4) Quarterly control reports
5) Two reliable sources for each item
6) Minimum value analysis
7) Rough estimates for planning
8) Annual review over surplus and obsolete materials
9) Minimum clerical efforts
Making ABC Analysis:
The entire procedure for making ABC analysis can be summarized in the following steps:
1) Calculate rupee annual issues or each item in inventory by multiplying the unit cost byte number of units used in a year.
2) Sort all items by rupee annual issues in descending order.
3) Prepare a table showing item No., Unit cost, annual units issued and annual rupee value of unit issued.
4) Starting at the top of the list compute a running total item by item issue value and the rupee value of consumption.
5) Compute the cumulative percentage for the item count and cumulative annual issue value.
The normal items in most organizations show following pattern:
1) 5% to 10% of top numbers items account for 70% of total consumption value. These items are ‘A’ class.
2) 15% to 20% of the number items account for 20% of total consumption value. They are ‘B’ class.
3) The remaining number of items account for the balance 15% of total consumption value. They are ‘C’ class items.
Advantages of ABC analysis:
This approach helps the materials manager to exercise selective control and focus his attention only on a few items when he is confronted with lakhs of stores items.
By concerning on ‘A’ category the materials manager is able to control inventories and show visible results in a short span of time, By controlling the ‘A’ its and doing a proper inventory analysis, obsolete stocks are automatically pinpointed. Many organizations have claimed that the ABC analysis has helped in reducing the clerical costs and resulted in better planning and improved inventory turnover. ABC analysis has to be resorted to because equal attention to ‘A’ ‘B’ and ‘C’ items will not be worth while and would be very expensive. Concentrating on all the items is likely to have a diffused effect on all the items irrespective of the priorities.