I need four responses of at least 150 words each for the below students discussions for this week. Also in the bold below are the questions the students at answering.
Describe what is meant by ABC analysis. What is the purpose
of this inventory technique — provide an example. In your responses
to other students, please identify strengths and weaknesses of
their ABC analysis applied to their examples.
ABC Analysis for inventory is a method of classifying inventory using the pareto principle. This is where roughly 20% of your total inventory accounts for 70-80% of the value. These are classified as A inventory and this category is tightly managed. The next category of inventory makes up about 30% of your total inventory but accounts for 15-20% of the value. This B category must be watched regularly as there are items that could potentially become A inventory depending on customer demand. The final category, C, accounts for almost 50% of the inventory but is valued at 10%. This category is still important as it is likely essential for your business, but employing tight inventory controls is likely not cost effective. (Bashin, 2019)
An example of this would be if you sold tables. Your A category inventory is your high-end large profit models that you apply strict inventory control and special handling procedures to. This enables your company to always have these available while not overstocking and putting yourself at risk. Your next group of tables, your B category, are the models that are potentially seasonal and their value is good for your business, but not as valuable as your A inventory. Your final group of products are the C category that you potentially sell frequently, but the overall value compared to the quantity isn’t high (Orderhive, 2019)
Some reasons for using ABC Inventory analysis end-of-life management, improved supplier negotiation, inventory optimization, strategic pricing, resource allocation, and customer service levels.
Inventory optimization is a method of organizing and segregating products in the inventory based on their revenue and importance. Resource allocation seems like one of the best values from this method as it makes sense that your category A inventory should get the most amount of resources dedicated to it.
Bashin, H. (2019, October 15). ABC Analysis in Inventory Management.Retrieved from Marketing91: https://www.marketing91.com/abc-analysis/
Orderhive. (2019, March 26). The Ultimate Guide to Inventory Classification: ABC Analysis.Retrieved from Orderhive: https://www.orderhive.com/knowledge-center/abc-ana...
BC analysis is a method of analysis that divides the subject up into three categories: A, B and C. Category A represents the most valuable products or customers that you have. These are the products that contribute heavily to your overall profit without eating up too much of your resources ABC analysis may be seen to share similar ideas as the Pareto principle, which states that 80% of overall consumption value comes from only 20% of items. Plainly, it means that 20% of your products will bring in 80% of your revenues.
Inventory management and optimization in general is critical for business to help keep their costs under control. ABC analysis works towards this goal by letting management focus most of their attention on the few highest value goods (the A-items) and not on the many low value, trivial goods (the C-items).
ABC analysis works by breaking it down in the following ways:
- A-items: 20% of all goods contribute to 70-80% of the annual consumption value of the items
- B-items: 30% of all goods contribute to 15-25% of the annual consumption value of the items
- C-items: 50% of all goods contribute only 5% of the annual consumption value of the items
In order to calculate the annual consumption value of any item or items:
Annual consumption value = annual demand x item cost per unit
That way, the manager can determine which goods bring in the most value and separate those from the numerous goods that provide little profit.
What is ABC analysis? (2019), Retrieved from: https://www.invoiceberry.com/accounting-terms/abc-analysis
The idea of ABC analysis is to categorize your inventory and time spend on managing those inventory levels into three simple groups (Rusanescu, 2014). What this does is allows employees to focus their time on things that will affect a business’s inventory management control (Render, Stair, Hanna, & Hale, 2015, p.216). While working at Home Depot I was giving the opportunity to manage several departments throughout the store. Something our store manager did was encourage the department managers to actually manage their own departments accordingly as long as all the metrics where met. The flooring department was one of those that I managed. Take a tile project, when selling a tile project, you aren’t going to tell the customer everything they need all up front and the cost on those items because it will push them away. You are going to sell the idea of the project they are looking to do and once they are sold on actually doing the work, that is when you walk them down the aisle and load up their cart to ensure they have everything (EVERYTHING!!!) they need before they leave. Few things are more annoying than thinking you have everything only to have to drive back to the store because you forgot a bucket or something silly. Thinking about the tile project idea think about the Tile and Tile mud as items in the Group C. The small tools or little spacers in Group B and the Tile saw or Specialty items for items in Group A. If you look in the overheads of a tile department, you are going to find pallets and pallets of Tile boxes and Tile Mud. This is because in order to do a tile job, you are going to need lots of those items. Plus, the professional guys who come in already know they only want 25 bags of tile mud. These items are in Group C because they require the least amount of time management because these items aren’t really going to have any issue selling. You just want to ensure they are constantly coming in on time. Items like these are probably going to be on auto shipment from the supplier. Items in Group B are going to be moderately priced higher that those in Group C, a little more time is going to be spend on these because they might sell a little slower and you want to ensure proper time is spent on those to ensure you don’t run out. Meanwhile, Group A is going to be the high-ticket items like the Big Daddy “Benford 2000” Wet Tile Saw that basically lays the tile for you. These are in Group A because they cost so much money. They are the items that lost prevention are going to be monitoring as theft items because they cost so much money, usually. They are nice to have in the store because you always want to start with those on a sale (Good, Better, Best ,Method of sales), but since they usually only account for a few items they are counted and ordered first because those are the things that are going to eat up your business dollars if you have way too much of those inventory levels. If you get 20 Big Daddy Benford 2000 Tile Saws in on a monthly shipment when you usually sell 5 a year, you might want to call someone and see what was the reason for that shipment because items sitting in the overhead are the items that are just eating up your inventory budget.
Render, B., Stair, R. M., Hanna, M. E., & Hale, T. S. (2015). Quantitative Analysis for Management(12th ed.). Boston, MA: Pearson. p. 216.
Rusanescu, M. (2014). ABC ANALYSIS, MODEL FOR CLASSIFYING INVENTORY. Hidraulica, 17–20. Retrieved from http://search.proquest.com/docview/1540973163/
Describe what is meant by ABC Analysis
ABC analysis is an inventory technique used to divide up company inventory into groups. The purpose is to divide the inventory into three groups which are based on the overall inventory value of the items being divided. The three groups are usually group A, B, and C. Group A is the major portion of the inventory cost and mistakes at this level are very expensive because it accounts for about 70 percent of the dollar value. Group B involves moderate levels of control and represents only about 20 percent of the cost and about 20 percent of quantity as well. Group C on the other hand involves items that are very low cost, but high volume. Managing such items is not cost effective and a lot of time should not be spend managing these items. Policies are simple and control is loose at the group C level.
Provide an example
An example of an ABC analysis would be if I had a business making and selling custom made mugs and straws. I made 200 mugs in the middle of July and now I don’t have enough customers ordering the mugs. I get a lot of orders during the cold/winter season and not a lot during the warmer months. To sell the mugs and make maximum profit, I must categorize them using the ABC analysis.
Group A: No one is interested in my straws this winter season. The mugs that a high in demand right now are ones with Christmas designs and I must sell them all before the holiday season is over. These are the one that are generating the most revenue for me right now. I will count all my inventory gather all Christmas mugs and sell those first. I will also print Christmas designs on all plain mugs and sell them as well. I am looking at selling about 140 of my mugs before the season runs out.
Group B: I had a couple of customers order straws. I made a couple of mugs with fall designs, but they are not in demand as the Christmas mugs. I still get a few orders here and there. I have to still sell these mugs to customers and not neglect them, but my primary focus is on selling those in Group A. I am looking at selling 40 mugs in this category.
Group C: I have mugs that are neither in the first two categories, must I still would like to sell them. Being that I am working this business alone, I do not want to dedicate my time and effort marketing the last 20 mugs and straws. The straws are high in volume, but cost less to make and sell.
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