Page 279 - DCOM303_DMGT504_OPERATION_RESEARCH

Operations Research

Notes There are a number of methods of Selective Inventory Control viz., ABC Analysis (Always
Better Control Analysis), VED Analysis (Vital, Essential, Desirable items, Analysis), F.S.N.
Analysis (Fast Moving, Slow Moving and Non-moving items Analysis), etc.

13.3.1 ABC Analysis

Always Better Control Analysis is based on the famous ‘Pareto’s law. Under this, the materials
in the stock/store are classified by considering three important features:
1. Vitality of the materials

2. Consumption value of the materials
3. Rate of movement.
The analysis reveals that:

(i) A smaller % of items in the stores (say 10%) contribute to a larger % of value of consumption
(say 70%);
(ii) A large % of items in the stores (say 70%) contribute to a small % of value of consumption
(say 10%); and
(iii) Between these two extremes, the items which come, have the equal usage and consumption
value.

Hence, the first category items are grouped under ‘A’ category, the third category items are
grouped under ‘C’ category, and the second category items are grouped under ‘B’ category. The
analysis can be fit into a rectangle to depict the significance of the analysis.
Consumption (C.V.)
A A

B B
C C

Vitality of items (V.I.)
Let us consider a few examples of A B C Analysis and find out how the materials are classified.

Example: In Mumbai, a large scale pharmaceuticals company carries the following items
on its inventory, the annual consumption and price per unit which have been shown in the
following table. You have to design A, B, C analysis system for this organization for which
purpose classify items in A, B and C categories on first ranking table and then prepare the table
of cumulative annual usage and cumulative usage percentage. Kindly plot a suitable graph also.
Units Annual consumption in units Price per unit (`)
A 5,000 10
B 650 10
C 1,800 18
D 1,200 1
E 60 8
F 6,500 6
G 2,500 5
H 4,200 1
I 50 10
J 100 7
K 50 35 Contd...
L 2,000 8
M 20 25
N 30 10
274 O 80 6
LOVELY PROFESSIONAL UNIVERSITY
P 200 0.15
Q 750 0.50
R 300 4.00
S 100 7.00
T 20 10.00