In my previous post, I briefly defined ABC analysis and a general concept as to how much of Class A, B, and C items may constitute in the inventory.
An analyst can classify items into ABC through calculating dollar usage. Dollar usage is calculated by multiplying the annual demand rate by dollar value (cost) of a particular item.
After ranking items according to dollar usage and creating "Pareto Chart" (Which I will share in my next posts to come. If its urgent, you can search wikipedia for Pareto Chart.), the analyst may look for natural changes in slope.
And after classifying the items appropriately, a manager may direct that class A items be reviewed daily/frequently to reduce the average lot size and keep inventory records current.
In the same way, Class C items can be observed under loose control. Although stockouts of Class C can be as lethal as that of A, but the inventory holding costs of Class C items tend to be low as compared to Class A items. Which allow a manager to increase safety stocks, have larger lot sizes while ordering etc.
An analyst can classify items into ABC through calculating dollar usage. Dollar usage is calculated by multiplying the annual demand rate by dollar value (cost) of a particular item.
After ranking items according to dollar usage and creating "Pareto Chart" (Which I will share in my next posts to come. If its urgent, you can search wikipedia for Pareto Chart.), the analyst may look for natural changes in slope.
And after classifying the items appropriately, a manager may direct that class A items be reviewed daily/frequently to reduce the average lot size and keep inventory records current.
In the same way, Class C items can be observed under loose control. Although stockouts of Class C can be as lethal as that of A, but the inventory holding costs of Class C items tend to be low as compared to Class A items. Which allow a manager to increase safety stocks, have larger lot sizes while ordering etc.
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