inventoy control

The objectives of inventory management can be explained in detail as under:


(i) To ensure that the supply of raw material & finished goods will remain continuous so that production process is not halted and demands of customers are duly met.


(ii) To minimise carrying cost of inventory.


(iii) To keep investment in inventory at optimem level.


(iv) To reduce the losses of theft, obsolescence & wastage etc.


(v) To make arrangement for sale of slow moving items.


(vi) To minimise inventory ordering costs.


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.

The ABC analysis provides a mechanism for identifying items that will have a significant impact on overall inventory cost, [1] while also providing a mechanism for identifying different categories of stock that will require different management and controls.[2]

The ABC analysis suggests that inventories of an organization are not of equal value. [3] 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, frequently value analysis are 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. [4]
[edit] ABC analysis categories

* ‘A’ items – 20% of the items accounts for 70% of the annual consumption value of the items.
* ‘B’ items - 30% of the items accounts for 25% of the annual consumption value of the items.
* ‘C’ items - 50% of the items accounts for 5% of the annual consumption value of the items.[5]

ABC Analysis is similar to the Pareto principle in that the 'A' items will typically account for a large proportion of the overall value but a small percentage of the overall volume of inventory.[6]

Another recommended breakdown of ABC classes[7]:

1. "A" approximately 10% of items or 66.6% of value
2. "B" approximately 20% of items or 23.3% of value
3. "C" approximately 70% of items or 10.1% of value


STEPS IN ABC ANALYSIS

* The steps in computing ABC analysis are:

* a Determine the annual usage in units for each item for the past one-year.

* b. Multiply the annual usage quantity with the average unit price of each item to calculate the annual usage in US$ for each item.

* c. Item with highest dollar usage annually is ranked first. Then the next lower annual usage item is listed till the lowest item is listed in the last.

* d. Table 1 shows ranks of the items according to the annual usage in US$. for 10 items.

* e. Arrange the items in the inventory by cumulative annual usage (dollars) and by cumulative percentage. Categorize the items in A, B , and C categories.