Page 30 - DMGT525_MATERIALS_MANAGEMENT

Unit 2: ABC Analysis

 “C” Category items represent 50% of actual items but only 5% of the inventory value. Notes
 The Pareto analysis is based on the Pareto Principle, also known as the 80/20 rule, which
states that 20 percent of effort yields 80 percent of results.

 One of the disadvantages of Pareto charts is that they provide no insight on the root
causes.

 Another disadvantage of Pareto charts is that as more are created with finer detail, it is
also possible to lose sight of these causes in comparison to each other.
 Qualitative statistics are needed to know whether or not a process can stay within a
specification limit.

2.7 Keywords

ABC Analysis: The ABC analysis is a business term used to define an inventory categorization
technique often used in materials management.

Annual Requirement Value (ARV): It is calculated by multiplying the unit (monetary) value of
an item by its annual usage. The higher the annual requirement value of an item, the greater the
level of control that is called for.
Usage Rate: Quantity of a good or service used in a given period and expressed in a suitable unit
of measurement.
Consumption: The process in which the substance of a thing is completely destroyed, used up, or
incorporated or transformed into something else.

Inventory System: It is the software used to plan and track inventory balances and activities.
Obsolete: A thing is obsolete when it is no longer in use.
Safety Stock: Safety stock (also called buffer stock) is a term used by logisticians to describe a
level of extra stock that is maintained to mitigate risk of stock-outs due to uncertainties in
supply and demand.
Histogram: A histogram is a chart that prioritizes the causes of problems from the greatest to the
least severe.

2.8 Review Questions

1. What do you mean by ABC analysis?
2. What is the main objective of ABC analysis?

3. Discuss the various advantages of ABC analysis.
4. Explain the limitations of ABC analysis.
5. How Pareto analysis helps you to improve your problem-solving skills?
6. Differentiate between qualitative data and quantitative data.
7. Discuss the importance of ABC analysis.

8. Give a diagrammatic representation of A, B and C categories.
9. What is ABC curve? What does it represent?
10. What is the main focus of problem resolution or improvement?

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