Page 185 - DMGT206_PRODUCTION_AND_OPERATIONS_MANAGEMENT

Production and Operations Management

Notes usage, while the remaining 80 percent of the items typically account for remaining 20 per cent of
the rupee value. This truth leads to the ABC classification.
The ABC classification is based on focusing efforts where the payoff is highest, i.e., high-value,
high-usage items must be tracked carefully and continuously. As these items constitute only
20 per cent, the ABC analysis makes the task relatively easier.

After calculating the rupee usage for each inventory item, the items are ranked by rupee usage,
from highest to lowest. The first 20 per cent of the items are assigned to class ‘A’. These are the
items that warrant closest control and monitoring through a perpetual inventory system.
One of the major costs of inventory is annual carrying costs, and your money is invested largely
in class ‘A’. Tight control, sound operating doctrine, and attention to security on these items
would allow you to control a large rupee volume with a reasonable amount of time and effort.
The next 30 per cent of the items are classified as ‘B’ items. These deserve less attention than ‘A’
items. Finally, the last 50 per cent of items are ‘C’ items. These have the lowest rupee usage and
can be monitored loosely, with larger safety stocks maintained to avoid stock outs. They should
have carefully established but routine controls.
Table 9.3: ABC Analysis of Chest of Drawers

Item Description Annual Rupee Percent of Total Cumulative ABC
Stock Number Usage Rupee Usage Usage Classification
B 101 Sides 43600 21.96 21.96 ‘A’
H 107 Drawer sides 31000 15.61 37.57 ‘A’
F 105 Drawer front 25215 12.70 50.27 ‘A’
J 109 Drawer back 20020 10.08 60.35 ‘A’
A 100 Top 15000 7.55 67.91 ‘B’
G 106 Drawer front 13080 6.59 74.50 ‘B’
D 103 Frame rail 12075 6.08 80.58 ‘B’
M 112 Web frame end 11000 5.54 86.12 ‘B’
L 111 Web frame rail 7000 3.53 89.64 ‘C’
C 102 Frame rail 6250 3.15 92.79 ‘C’
I 108 Drawer sides 6000 3.02 95.81 ‘C’
E 104 Toe kick 4140 2.09 97.90 ‘C’
K 110 Drawer back 4000 2.01 99.91 ‘C’
N 113 Nails 80 0.04 99.95 ‘C’
O 114 Screws 55 0.03 99.98 ‘C’
P 115 Knobs 40 0.02 100.00 ‘C’
Total 198555.00

Example: The ABC Analysis shows that in the 16 items in the BOM, the first 20 per cent
have a rupee usage of 60.35 per cent, the next thirty per cent have a rupee usage of 25.77 per cent,
and the last 50 per cent have a rupee usage value of only 13.88 per cent. You can also see that only
4 items fall in the ‘A’ category, 4 items in the ‘B’ category, and the remaining 8 items fall in the
‘C’ category. Though, the example does not show the 80-20 rule because this is a made-up
example, it does indicate a trend towards the 80-20 rule.

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