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ABC Analysis for Stores Organization & Inventory Control Management

For a manufacturing business, money is locked in the form of raw material, semi-finished, finished goods, stock of spares and consumables and etc., Over stocking will directly reduce the working capital. Less held will disturb the smooth process flow and affect production cost. Poorly managed inventory leads to revenue loss and business failures. ‘Effective management’ on these holding items is vital to any organization.

Inventory Control and stores organization constitutes a major management discipline which is designed to ensure optimum total inventory holding cost at the satisfied delivery level. Properly managed stores system will assure:

Prevent frequent ordering of items.

Avoid ordering of items in non-optimal batch quantity.

Streamline the system of procurement

Take advantage of the price reduction and discounts

Avoid Stagnation of items

Support for unique short codification to store easy and locate items

Periodical disposal of obsolete items

Evaluate an optimal procedure for ordering and storing of slow moving items

Evaluate an optimal procedure for ordering and storing of regular consumption

Monitor the stock levels as frequently as possible

Minimum inventory with minimum stock-out situations

Make inventory system an integral part of the total Management Information System.

ABC Analysis

As thumb rule, it is stated that such as 20% of the items in inventory may account for 80% of the inventory value. This rule of thumb is approximately true but the said percentages will vary depending on the type of inventory.

On close examination of a large number of multi-item inventories has revealed a useful statistical regularity in the distribution of the demand rate in the inventory. It has been observed that items demand rate follow a lognormal distribution. The logarithms of the items demand are normally distributed, that is, they fall into well known bell-shaped normal distribution pattern. Consequently, most items have relatively low demand and a few have high demand; proportionally few items account for the major part of the total demand. This observation is useful and assists in identifying the amount of investment represented by the different proportions of the inventory.

This study is helpful in classifying the stored items according to their demand rate so that each group may be provided with approximate form of control. ABC Analysis is one of the best approach to segment the stock in different controllable group.

Group A:

The top 5% to 10% of items which accounts for the highest value of the total inventory value.

Group B:

The next 10% to 20% of the items which accounts for a moderate share of the total inventory value.

Group C:

The remaining large group of stock items will account for small fraction of the total inventory value.

The objective of such a classification is to separate out the third group that is C group which is large in numbers and so potentially require a large number of record keeping and attention efforts but relatively unimportant from the point of keeping inventory investment at even reasonable level. These items are characteristically low unit valued items with low usage rate.

After classifying with ABC analysis, it is good to apply Two Bin system (or Reorder level system) for A and B group items and review period system for C group items. Minimum stock, maximum stock, reorder level (ROL), safety stock (SS), Economic ordering quantity (EOQ) and ordering cost are some of the essential components of Two Bin System to optimally control the items of group A and B, which are fast moving items. Hence the stores activities will be fully streamlined with minimum inventory holding cost and the best delivery model.

Wish to analyze your stores and apply ABC analysis to separate item stock to different groups, Contact Us

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