Page 23 - DMGT525_MATERIALS_MANAGEMENT

Materials Management

Notes Self Assessment

Fill in the blanks:
1. Two possible factors are the usage rate for an item and its ………… value.
2. Close control is more important for ………. moving items with a high unit value.

3. ABC Analysis can be used to classify …………… groups.
2.2 Objective /Purpose of ABC Analysis

ABC Analysis allows inventory/purchasing managers to segregate and manage the overall
inventory/suppliers into three major groups. This allows different inventory/supplier
management techniques to be applied to different segments of the inventory/suppliers in order
to increase revenue and decrease costs. In terms of Pareto Analysis, it separated the critical few
from the trivial many.

Notes 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” Category items generally represent approximately 15%–20% of an overall inventory by
item, but represent 80% of value of an inventory.

Example: If you were running a restaurant. Approximately 20% of the menu items
would account for 80% of the profit taken in by the restaurant. By using a Pareto Analysis, the
owner of restaurant would know which menu items to focus his business around.
By paying close attention in real-time to the optimization of these items in inventory, a great
positive impact is possible with minimal increase in inventory management costs. ‘A’ items
merit a tightly controlled inventory system with constant attention by the purchase manager
and stores management.
‘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” Category items represent 30%–35% of inventory items by item type, and about 15% of the
value. These items can generally be managed through period inventory and should be managed

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