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ABC Analysis for

Inventory
Michael Iosua
MBA 530, Dr. Foster
Class of 2009

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What is ABC Analysis for Inventory?


Brainstorming Activity
Nuts and Bolts
How ABC Analysis works
A Real World Example
ABC Analysis Exercise
Summary
Further Readings
Appendix

What is ABC Analysis for


Inventory?
An inventory control system
Categorizes by dollar volume contribution
Valuable for small businesses

Brainstorming Exercise
Which items contribute most to your
dollar volume?
What is your inventory control method?
How much inventory is wasted due to
lack of inventory control?

Nuts and Bolts


1. Strict control of high dollar volume items
2. Higher inventory control level
3. Leads to inventory turnover and service
level increases
4. Resources are better allocated to control
efforts.

Drawbacks of ABC Analysis for


Inventory

Less control over B and C, etc. items


Not an all-purpose inventory control
method
Profit not necessarily maximized

How does ABC analysis work?


Steps in ABC Analysis:
1. Determine the dollar volume
2. Rank items.
3. Calculate the percentage dollar volume
for each item.

How does ABC analysis work?


(continued)
4. Determine the cumulative percentages
for number of items and dollar volume
5. Classify items as A, B, C, etc.

A Real World Example

Sam-Mart Produce
Department

Sam-Mart Produce Dept.


Continually dumps produce due to
spoilage
Has difficulty keeping its stock current
Must reduce spoilage costs

Sam-Mart Produce Dept.


Sam-Mart Produce Dept.
Product
Mangoes

Pounds Sold

Cost/lb

60

4.00

1000

1.00

Bananas

500

.75

Tomatoes

1000

2.00

Lettuce

Totals

100

$ Value

Step One: Determine dollar value


Product
Mangoes

Pounds Sold

Cost/lb

$ Value

650

4.50

2925.00

Lettuce

1950

.50

975.00

Bananas

2500

.60

1500.00

Tomatoes

900

.90

810.00

6210.00

Totals

6000

Step Two: Rank Items


Rank

Product

$ Value

Mangoes

2925

Bananas

1500

Lettuce

975

Tomatoes

810

6210

Totals

% of $

Cum %
of $
value

Cum %
of units

Class

Step Three: Calculate percentage


of total dollar volume for each item
Rank

Product

$ Value

Mangoes

2925

47.1%

Bananas

1500

24.2%

Lettuce

975

15.7%

Tomatoes

810

13.0%

6210

100.0%

Totals

% of $

Cum %
of $
value

Cum %
of units

Class

Step Four: Determine cumulative


percentages
Rank

Cum %
of units

Product

$ Value

Mangoes

2925

47.1%

47.1%

10.8%

Bananas

1500

24.2%

71.3%

52.5%

Lettuce

975

15.7%

87.0%

85.0%

Tomatoes

810

13.0%

100.0%

100.0%

6210

100.0%

Totals

% of $

Cum %
of $
value

Class

Step Five: Classify items


Rank

Cum %
of units

Product

$ Value

Mangoes

2925

47.1%

47.1%

10.8%

Bananas

1500

24.2%

71.3%

52.5%

Lettuce

975

15.7%

87.0%

85.0%

Tomatoes

810

13.0%

100.0%

100.0%

6210

100.0%

Totals

% of $

Cum %
of $
value

Class

ABC Analysis Exercise


Earnhardt Auto-Mart
Sells water pump, timing belt, oil filter,
quart of oil
Needs to improve inventory control

Earnhardt Auto-Mart
Product

Items sold

Cost per item

$ Value

Water Pump

10

150

Timing belt

10

50

Oil filter

50

15

Oil quart

100

Totals

170

Summary
Priority on high dollar volume
items
Tighter control of priority items
Not an all purpose method
Holds to Pareto rule

Further Readings
Bhattacharya, Arijit; Sarkar, Bijan; Mukherjee, Sanat.
(2007). Distance-based consensus method for ABC
analysis. International Journal of Production Research,
45(15), pp. 3405-21. Retrieved from Business Source
Premier.
Partovi, Fariborz; Hopton, Walter. THE ANALYTIC
HIERARCHY PROCESS APPLIED TO TWO TYPES OF
INVENTORY PROBLEMS. Production & Inventory
Management Journal, 35(1), pp. 13-20. Retrieved from
Business Source Premier.

Further Readings (continued)


Flores, Benito; Whybark, D. Clay. IMPLEMENTING
MULTIPLE CRITERIA ABC ANALYSIS. Engineering
Costs & Production Engineering, 15(1-4), pp. 191-6.
Retrieved from Business Source Premier.

Appendix

References
Fuerst, William J. SMALL BUSINESSES GET A NEW
LOOK AT ABC ANALYSIS FOR INVENTORY
CONTROL. Journal of Small Business Management,
45(15), pp. 39-44. Retrieved from Business Source
Premier.
Caldwell, Bruce D. The Benefits of ABC Analysis for
Inventory Reduction. The Connecticut Association of
Purchasing Management, Inc. Retrieved November 20,
2007, from http://www.capminc.org/abcanalysis.htm

Earnhardt Auto-Mart
Product

Items sold

Cost per item

$ Value

Water Pump

10

150

Timing belt

10

50

Oil filter

50

15

Oil quart

100

Totals

170

Step One: Determine dollar value


Product

Items sold

Cost per item

$ Value

Water Pump

10

150

1500

Timing belt

10

50

500

Oil filter

50

15

750

Oil quart

100

300

Totals

170

3050

Step Two: Rank Items


Rank

Product

$ Value

Water
pump

1500

Oil filter

750

Timing
belt

500

Oil quart $

300

3050

Totals

% of $

Cum %
of $
value

Cum %
of units

Class

Step Three: Calculate percentage


of total dollar volume for each item
Rank

Product

$ Value

Water
pump

1500

49.2%

Oil filter

750

24.6%

Timing
belt

500

16.4%

Oil quart $

300

9.8%

3050

100.0%

Totals

% of $

Cum %
of $
value

Cum %
of units

Class

Step Four: Determine cumulative


percentages
Rank

Cum %
of units

Product

$ Value

Water
pump

1500

49.2%

49.2%

5.9%

Oil filter

750

24.6%

73.8%

35.3%

Timing
belt

500

16.4%

90.2%

41.2%

Oil quart $

300

9.8%

100.0%

100.0%

3050

100.0%

Totals

% of $

Cum %
of $
value

Class

Step Five: Classify items


Rank

Cum %
of units

Product

$ Value

Water
pump

1500

49.2%

49.2%

5.9%

Oil filter

750

24.6%

73.8%

35.3%

Timing
belt

500

16.4%

90.2%

41.2%

Oil quart $

300

9.8%

100.0%

100.0%

3050

100.0%

Totals

% of $

Cum %
of $
value

Class

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