OPERATIONS MANAGEMENT- ABC ANALYSIS

OPERATIONS MANAGEMENT
ASSIGNMENT
ON
ABC ANALYSIS

Submitted To:

Submitted By:

Prof. Alok

PG (83)

OPERATIONS MANAGEMENT- ABC ANALYSIS

INTRODUCTION:
The ABC analysis is a business term used to define an inventory categorization technique often
used in materials management. It is also known as Selective Inventory Control. Policies based on
ABC analysis:

A ITEMS: very tight control and accurate records.

B ITEMS: less tightly controlled and good records.
C ITEMS: simplest controls possible and minimal records.

The ABC analysis provides a mechanism for identifying items that will have a significant impact
on overall inventory cost, while also providing a mechanism for identifying different categories
of stock that will require different management and controls.
The ABC analysis suggests that inventories of an organization are not of equal value.Thus, the
inventory is grouped into three categories (A, B, and C) in order of their estimated importance.
'A' items are very important for an organization. Because of the high value of these A items,
frequent value analysis is required. In addition to that, an organization needs to choose an
appropriate order pattern (e.g. Just-in-time) to avoid excess capacity.
'B' items are important, but of course less important than A items and more important than C
items. Therefore B items are intergroup items.
'C' items are marginally important.

OBJECTIVE:
To analyze the inventory of a company on the basis of ABC analysis and identify which of the
products fall under category A, B or C.

ANALYSIS:
KG INFOTECH is an electronic shop that sells computer parts required for assembling a
computer and also sells other computer related accessories. The annual sales for this shop are as
follows:

OPERATIONS MANAGEMENT- ABC ANALYSIS

S.NO.

ITEM TYPE

ITEM
NUMBER

ANNUAL DEMAND
(In thousands)

COST/Unit (in Rs.)

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16

Headphones
Mouse
Keyboard
Monitor LED
CPU Intel
Motherboard
Hard Disk
DVD RW
RAM
Display Card
Cabinet
Printer
Speaker
UPS
Webcam
Pen Drive

101
102
103
104
105
106
107
108
109
110
111
112
113
114
115
116

45
20
25
34
33.5
33
35
34
33
10
10
30
30
10
5
42

400
500
1000
5300
7500
3000
4500
1300
1500
1750
2300
5000
2500
5000
1490
500

STEPS FOR ABC ANALYSIS:

1. Calculate total annual usage for all the products sold in this shop i.e. Cost/unit x annual
demand for a particular good.
2. Sort the annual usage values in the descending order.

ITEM
NUMBER
105
104
107
112
106
113
114
109
108
103
111

ANNUAL
DEMAND
(In
thousands)
33.5
34
35
30
33
30
10
33
34
25
10

COST/UNIT
(in Rs.)

ANNUAL
USAGE VALUE
(in Rs.)

7500
5300
4500
5000
3000
2500
5000
1500
1300
1000
2300

251250
180200
157500
150000
99000
75000
50000
49500
44200
25000
23000
3

OPERATIONS MANAGEMENT- ABC ANALYSIS

116
101
110
102
115
TOTAL

42
45
10
20
5

500
400
1750
500
1490

21000
18000
17500
10000
7450
1178600

3. Calculate cumulative usage value and also the percentage of the annual usage value. Next
the cumulative usage as a percentage is also to be calculated.

ITEM
NUMBER
105
104
107
112
106
113
114
109
108
103
111
116
101
110
102
115
TOTAL

ANNUAL
DEMAND (In
thousands)

COST/UNIT

33.5
34
35
30
33
30
10
33
34
25
10
42
45
10
20
5

7500
5300
4500
5000
3000
2500
5000
1500
1300
1000
2300
500
400
1750
500
1490

ANNUAL
USAGE
VALUE

CUMULATIVE
USAGE VALUE (in
thousand Rs.)

USAGE AS
PERCENTAGE OF
TOTAL (%)

251250
180200
157500
150000
99000
75000
50000
49500
44200
25000
23000
21000
18000
17500
10000
7450
1178600

251250
431450
588950
738950
837950
912950
962950
1012450
1056650
1081650
1104650
1125650
1143650
1161150
1171150
1178600

21.318
15.289
13.363
12.727
8.400
6.363
4.242
4.200
3.750
2.121
1.951
1.782
1.527
1.485
0.848
0.632
100

CUMULATIVE
USAGE AS
PERCENTAGE OF
TOTAL (%)
21.32
36.61
49.97
62.70
71.10
77.46
81.70
85.90
89.65
91.77
93.73
95.51
97.03
98.52
99.37
100

4. As a next step, calculate percentage contribution of each product and also the cumulative
percentage contribution.

OPERATIONS MANAGEMENT- ABC ANALYSIS

ITEM
NUMBER

ANNUAL
DEMAND
(In
thousands)

COST/UNIT

ANNUAL
USAGE
VALUE

CUMULATIVE
USAGE VALUE
(in thousand
Rs.)

USAGE AS
PERCENTAGE
OF TOTAL (%)

CUMULATIVE
USAGE AS
PERCENTAGE OF
TOTAL (%)

CONTRIBUTI
ON OF EACH
PRODUCT
TYPE (%)

CUMULATIVE
CONTRIBUTION
(%)

105

33.5

7500

251250

251250

21.32

21.32

6.25

6.25

104

34

5300

180200

431450

15.29

36.61

6.25

12.5

107

35

4500

157500

588950

13.36

49.97

6.25

18.75

112

30

5000

150000

738950

12.73

62.70

6.25

25

106

33

3000

99000

837950

8.40

71.10

6.25

31.25

113

30

2500

75000

912950

6.36

77.46

6.25

37.5

114

10

5000

50000

962950

4.24

81.70

6.25

43.75

109

33

1500

49500

1012450

4.20

85.90

6.25

50

108

34

1300

44200

1056650

3.75

89.65

6.25

56.25

103

25

1000

25000

1081650

2.12

91.77

6.25

62.5

111

10

2300

23000

1104650

1.95

93.73

6.25

68.75

116

42

500

21000

1125650

1.78

95.51

6.25

75

101

45

400

18000

1143650

1.53

97.03

6.25

81.25

110

10

1750

17500

1161150

1.48

98.52

6.25

87.5

102

20

500

10000

1171150

0.85

99.37

6.25

93.75

115

1490

7450

1178600

0.63

100

6.25

100

TOTAL

1178600

100

Percentage Contribution of Usage value

5. Now, plot a line graph to identify the percentage contribution done by each product.

ABC ANALYSiS
120
100
80
60
Series1

40
20
0
0

20

40

60

80

100

120

Percentage Contribution

OPERATIONS MANAGEMENT- ABC ANALYSIS

RESULT:
Based on the graph, we can easily identify that 4 products (105, 104, 107, 112) belong to
Class A; 4 products (106, 113, 114, 109) belong to Class B; 8 products (108, 103, 111,
116, 101, 110, 102, 115) belong to Class C.

Category

Item Number

Class A
Class B

105, 104, 107, 112

106, 113, 114, 109

Class C

108, 103, 111, 116, 101,

110, 102, 115

Contribution
Usage
Percentage Percentage
25%
63%
25%
23%
50%

15%