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ID: 458574 • Letter: H
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Question
The company believes that it might have some inefficiencies in its inventory management process. Develop an ABC classification system for the following 10 items. Based on this information, what do you recommend for improving inventory management?
Item
Annual Demand
Cost/Unit
I5
1750
10.00
D1
6000
10.00
A2
3000
50.00
E9
1000
20.00
J8
2500
5.00
C7
1500
45.00
B8
4000
12.00
G2
300
1500.00
H2
600
20.00
F3
500
Item
Annual Demand
Cost/Unit
I5
1750
10.00
D1
6000
10.00
A2
3000
50.00
E9
1000
20.00
J8
2500
5.00
C7
1500
45.00
B8
4000
12.00
G2
300
1500.00
H2
600
20.00
F3
500
Explanation / Answer
ABC classification is a process of analysis of a range of objects such as items lying in inventory into three catageories.
A - Outstandingly important, 10-20% of items accounts for 70-80% of the consumption
B - Average importance, 15-25% of items account for 10-20% of consumption
C - Relatively unimportant, balance of 65-75% of items account for 5-10% of consumption.
For above problem, following are the steps for ABC analysis:
Step 1: Find the total cost by multiplying annual demand to cost per unit.
TOTAL COST( total of 10 items cost) = 837,500
Step 2. Find the percentage of each item consumption against total cost.
Consumption percentage = Individual total cost / Total cost * 100
Step 3. A includes item G2,A2 and C7 which counts of total 79.7% ( 53.73 + 17.91 + 8.06) of total spends
B includes items D1, B8,I5 and E9 which counts of total 17.37% of total spends.
C includes items H2 and J8 which counts of total 2.92% of total spends.
Item A is very important items and needs to track regular and maintain their inventory at all time. Non availability would cause heavy losses and halt the operations of entire plant.
In B catageory, above four item have average importance.
Item C are not critical, it may be available as needed. Not cause any huge damage.
Item Annual Demand Cost per unit Total Cost I5 1750 10 17,500 D1 6000 10 60,000 A2 3000 50 15,0000 E9 1000 20 20,000 J8 2500 5 12,500 C7 1500 45 67,500 B8 4000 12 48,000 G2 300 1500 450,000 H2 600 20 12,000 F3 500 0 0Related Questions
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