LESSON 4 Pareto Analysis and ABC Classification 29 August 2014

Lesson Objectives Upon completion of this lesson, you should be able to: Identify the purpose of a Pareto analysis Interpret a Pareto Chart to identify items requiring corrective or preventative action Determine which items would benefit from tighter inventory control and monitoring by interpreting ABC analysis results

Lesson Topics This lesson will cover the following topics: Pareto Analysis Steps for Constructing a Pareto Chart ABC Classification

What’s In It For Me? Your ability to interpret Pareto and ABC analysis results will improve your ability to monitor contractor performance and help you identify high priority issues without being distracted by trivial matters

Lesson Introduction What are common tools used for effective material management?

Pareto Analysis Lesson Topics: Pareto Analysis Steps for Constructing a Pareto Chart ABC Classification

Pareto Analysis Tool for prioritizing changes and identifying problems needing a resolution Helps you to focus on the causes that produce the most problems Also called the 80/20 Rule

Vilfredo Pareto Italian economist Described unequal distribution of wealth 20% of the people owned 80% of the wealth

Pareto’s Principle/Law Dr. Joseph Juran “Vital few and trivial many” Attributed his observations to the 80/20 Rule Named it Pareto’s Principle: “20% of effort is responsible for 80% results” Examples: 20% of the input creates 80% of the result 20% of the customers create 80% of the revenue 20% of the bugs cause 80% of the crashes 20% of the workers produce 80% of the work

Pareto Chart

Steps for Constructing a Pareto Chart Lesson Topics: Pareto Analysis Steps for Constructing a Pareto Chart ABC Classification

Steps for Constructing a Pareto Chart List problems Identify frequency Order by frequency Calculate percentage Calculate cumulative percentage Create Pareto chart

Example: Pareto Analysis Webs4U, a website design company, has been awarded a contract to update a website During an in-process review, numerous errors are identified Webs4U will now conduct a Pareto analysis to evaluate the faults

Example: Pareto Analysis - Step 1 List problems Problem Frequency of Occurrence % of Total Occurrences Cumulative % Broken Links Missing Images Script Errors Spelling Errors

Example: Pareto Analysis - Step 2 Identify frequency Problem Frequency of Occurrence % of Total Occurrences Cumulative % Broken Links 17 Missing Images 3 Script Errors 7 Spelling Errors 23

Example: Pareto Analysis - Step 3 Order by frequency Problem Frequency of Occurrence % of Total Occurrences Cumulative % Spelling Errors 23 Broken Links 17 Script Errors 7 Missing Images 3 Frequency must be sorted from most to least frequent

Example: Pareto Analysis - Step 4 Calculate percentage Problem Frequency of Occurrence % of Total Occurrences Cumulative % Spelling Errors 23 46% Broken Links 17 34% Script Errors 7 14% Missing Images 3 6% Total Errors: 23+17+7+3 = 50 errors Spelling Errors: 23 / 50 = 46% Broken Links: 17 / 50 = 34% Script Errors: 7 / 50 = 14% Missing Images: 3 / 50 = 6%

Example: Pareto Analysis - Step 5 Calculate cumulative percentage Problem Frequency of Occurrence % of Total Occurrences Cumulative % Spelling Errors 23 46% Broken Links 17 34% 80% Script Errors 7 14% 94% Missing Images 3 6% 100% Total cumulative percentage should equal 100%

Example: Pareto Analysis - Step 6 Create Pareto chart Data for each item in a column/bar chart Cumulative percentage in a line chart

Interpreting a Pareto Chart Which types of errors are the biggest contributors to the problem? 80% of Total Occurrences

Based on the Pareto chart, which issue(s) should be focused upon? Question and Answer Based on the Pareto chart, which issue(s) should be focused upon? Issue A only Issues A and B Issues B, C and D Issues A, B, C and D

Exercise: Pareto Analysis Individual Activity: Refer to Module 7, Lesson 4, Exercise 1 CMM100_M7_L4_E1_Exercise_FINAL.docx Read the directions in the exercise. Complete the activity; be prepared to share your responses Time allowed: 15 minutes

ABC Classification Lesson Topics: Pareto Analysis Steps for Constructing a Pareto Chart ABC Classification

A B C ABC Classification ABC Classification is an analysis of items by category Most often used with inventory control Can also be used in manufacturing for ranking parts of a process A B C - Extremely Important - Moderately Important - Relatively Unimportant

Steps for Conducting an ABC Classification Classify each item as either A, B, or C Rank items according to inventory values Determine the level of control for each classification

Example: Joint Light Tactical Vehicle Tactical Payload Systems, Inc. (TPS) is contractor for engineering, manufacturing, and fielding the Joint Light Tactical Vehicle (JLTV) for the United States (U.S.) Army and U.S. Marine Corps TPS wants to group the major components used in the JLTV by most expensive to least expensive

Example: ABC Inventory Compute % of Annual Cost File: CMM100_M7_L4_ABC_Scenario.xlsx

Example: ABC Inventory (cont.) Categorize the items by ABC: A items 40–99% annual cost B items .10–39% annual cost C items .009% and below annual cost Then rank by inventory values

Scenario Results Which category is extremely important for TPS to control? Items % of Items % of Annual Cost A 3/21 = 14.3% 98.35% B 6/21 = 28.6% 1.6% C 12/21 = 57.1% .02%

Question and Answer In an ABC Classification System, which grouping of items would require the most control for effective inventory management? A items B items C items All items are treated with the same level of inventory control

Exercise: ABC Analysis Individual Activity: Refer to Module 7, Lesson 4, Exercise 2 CMM100_M7_L4_E2_Exercise_FINAL.docx Read the directions in the exercise. Complete the activity; be prepared to share your responses Time allowed: 15 minutes

Summary Having completed this lesson, you should now be able to: Identify the purpose of a Pareto analysis Interpret a Pareto Chart to identify items requiring corrective or preventative action Determine which items would benefit from tighter inventory control and monitoring by interpreting ABC analysis results

Summary (cont.) Your ability to interpret the results of a Pareto analysis and an ABC analysis will allow you to identify areas of risk to focus your surveillance.

Module 7 Wrap Up Activity Refer to the Module 7 Wrap up Activity As a team, answer the questions in the Module 7 Wrap Up Activity File Each team must answer all the questions. Each Team must be prepared to present their answers. You have the remaining time as directed by the instructor to complete this activity.