Stock analysis classification ABC analysis XYZ analysis and the others PhD Joanna Oleśków Szłapka Poznan University of Technology

ABC analysis ABC analysis (or Selective Inventory Control) is an inventory categorization technique.  ABC analysis divides an inventory into three categories- "A items" with very tight control and accurate records, "B items" with less tightly controlled and good records, and "C items" with the simplest controls possible and minimal records.

ABC concept – Pareto 80/20 The ABC concept is derived from the Pareto's 80/20 rule curve. It is also known as the 80-20 concept.

ABC analysis 10-20% of the items ('A' class) account for 70-80% of the consumption the next 15-25% ('B' class) account for 10-20% of the consumption and the balance 65-75% ('C' class) account for 5-10% of the consumption 'A' class items are closely monitored because of the value involved (70-80% !)

(Should appear circular) ANNUAL RUP E E VOLUME A Items A Items HIGH Aspect Ratio Test (Should appear circular) B Items C Items LOW FEW MANY 16x9 NUMBER OF ITEMS

There are no fixed threshold for each class, different proportion can be applied based on objective and criteria.

The ABC analysis Steps for the classification of items: Find out the unit cost and and the usage of each material over a given period; Multiply the unit cost by the estimated annual usage to obtain the net value; List out all the items and arrange them in the descending value (Annual Value);

The ABC analysis Steps for the classification of items: Accumulate value and add up number of items and calculate percentage on total inventory in value and in number; Draw a curve of percentage items and percentage value; Mark off from the curve the rational limits of A, B and C categories.

Close day to day control ABC analysis Percentage of items Percentage value of annual usage Class A items About 20% About 80% Close day to day control Class B items About 30% About 15% Regular review Class C items About 50% About 5% Infrequent review

Close day to day control Example 1 Percentage of items Percentage value of annual usage Class A items About 20% About 80% Close day to day control Class B items About 30% About 15% Regular review Class C items About 50% About 5% Infrequent review

Step 1 Calculate the total spending per year Item number Unit cost Annual demand Total cost per year 101 5 48,000 240,000 102 11 2,000 22,000 103 15 300 4,500 104 8 800 6,400 105 7 4,800 33,600 106 16 1,200 19,200 107 20 18,000 360,000 108 4 109 9 5,000 45,000 110 12 500 6,000 Total usage 737,900 Total cost per year: Unit cost * total cost per year

Usage as a % of total usage Step 2 Calculate the usage of item in total usage Item number Unit cost Annual demand Total cost per year Usage as a % of total usage 101 5 48,000 240,000 32,5% 102 11 2,000 22,000 3% 103 15 300 4,500 0,6% 104 8 800 6,400 0,9% 105 7 4,800 33,600 4,6% 106 16 1,200 19,200 2,6% 107 20 18,000 360,000 48,8% 108 4 0,2% 109 9 5,000 45,000 6,1% 110 12 500 6,000 0,8% Total usage 737,900 100% Usage as a % of total usage = usage of item/total usage

Usage as a % of total usage Step 3 Sort the items by usage Item number Cumulative % of items Unit cost Annual demand Total cost per year Usage as a % of total usage Cumulative % of total 107 10% 20 18,000 360,000 48,8% 101 20% 5 48,000 240,000 32,5% 81,3% 109 30% 9 5,000 45,000 6,1% 87,4% 105 40% 7 4,800 33,600 4,6% 92% 102 50% 11 2,000 22,000 3,0% 94,9% 106 60% 16 1,200 19,200 2,6% 97,5% 104 70% 8 800 6,400 0,9% 98,4% 110 80% 12 500 6,000 0,8% 99,2% 103 90% 15 300 4,500 0,6% 99,8% 108 100% 4 0,2% Total usage 737,900

Step 4 Results of calculation Items Percentage of items Cathegory Items Percentage of items Percentage usage (%) Action Class A 107, 101 20% 81,6% Close control Class B 109, 105, 102, 106 40% 16,2% Regular review Class C 104, 110, 103, 108 2,5% Infrequent review

Additional rules for ABC analysis Cathegory Percentage of items Percentage of usage Class A items 5-25% 40-80% Class B items 20–40% 15-40% Class C items 40-75% 5-20% A ≤ B ≤ C

Inventory management policies Each item should receive a treatment corresponding to its class: A-items should have tight inventory control, more secured storage areas and better sales forecasts; reorders should be frequent, with weekly or even daily reorder; avoiding stock-outs on A-items is a priority.

Inventory management policies Each item should receive a treatment corresponding to its class: B-items benefit from an intermediate status between A and C; an important aspect of class B is the monitoring of potential evolution toward class A or, in the contrary, toward the class C.

Inventory management policies Each item should receive a treatment corresponding to its class: Reordering C-items is made less frequently; a typically inventory policy for C-items consist of having only 1 unit on hand, and of reordering only when an actual purchase is made; this approach leads to stock-out situation after each purchase which can be an acceptable situation, as the C-items present both low demand and higher risk of excessive inventory costs.

Procurement and Warehouse Applications The results of an ABC Analysis extend into a number of other inventory control and management processes: Review of stocking levels: “A” items will generally have greater impact on projected investment and purchasing spend, and therefore should be managed more aggressively in terms of minimum and maximum inventory levels; inactive items will fall to the bottom of the prioritized list; the bottom of the “C” category is the best place to start when performing a periodic obsolescence review.

Procurement and Warehouse Applications The results of an ABC Analysis extend into a number of other inventory control and management processes: Cycle counting: the higher the usage, the more activity an item is likely to have; to ensure accurate record balances, higher priority items are cycle counted more frequently; “A” items are counted once every quarter; “B” items once every 6 months; and “C” items once every 12 months.

Procurement and Warehouse Applications The results of an ABC Analysis extend into a number of other inventory control and management processes: Identifying items for potential consignment or vendor stocking: since “A” items tend to have a greater impact on investment, these would be the best candidates to investigate the potential for alternative stocking arrangements that would reduce investment liability and associated carrying costs.

Procurement and Warehouse Applications The results of an ABC Analysis extend into a number of other inventory control and management processes: Turnover ratios and associated inventory goals: “A” items will have greater usage than “B” or “C” items, and as a result should have greater turnover ratios; when establishing investment and turnover metrics, inventory data can be segregated by ABC classification, with different targets for each category.

Using your inventory / slot database, study the present slotting Using your inventory / slot database, study the present slotting. Identify 20 SLOW items slotted near the dock. Identify 20 FAST items stuck in slots in the rear of the warehouse.

Step 2. Identify 20 D "dead" or "Dog" items Step 2. Identify 20 D "dead" or "Dog" items. These are items that have NOT moved (sold) in 3 to 6 months. These could also be items dropped from the ORDER system. Move such D items to the 4th or 5th level of the racks in the rear of the layout. IMMEDIATELY put 'yellow ribbon' on the created EMPTY slots. Like the Police use

Step 3: Move the 20 selected C items close to the DOCK area Step 3: Move the 20 selected C items close to the DOCK area. Move them to the Empty slots now created by moving the D items. IMMEDIATELY put 'yellow ribbon' on the created EMPTY slots. Like the Police use.

Step 4.  Move the selected 20 FAST items from the rear of the layout to the Empty slots created by moving the C items in the Step 3.

Other Uses of ABC Used by managers in many different settings to improve operations. One key way occurs in customer service where a manager can focus attention on the most important aspect of customer service by categorizing different aspects of customer service as very important, important or of only minor importance

Example 2 Item number Annual quantity used Unit value 1 75 80 2 150,000 0,9 3 500 3,0 4 18,000 0,20 5 3,000 0,30 6 20,000 0,10 7 10,000

Step 1 Item number Annual quantity used Unit value Usage per year 1 75 80 6,000 2 150,000 0,9 135,000 3 500 3,0 1,500 4 18,000 0,20 3,600 5 3,000 0,30 900 6 20,000 0,10 2,000 7 10,000 Total usage 169,000

Percentage in total usage (%) Step 2 Item number Annual quantity used Unit value Usage per year Percentage in total usage (%) 1 75 80 6,000 3,51% 2 150,000 0,9 135,000 79,8% 3 500 3,0 1,500 0,87% 4 18,000 0,20 3,600 2,1% 5 3,000 0,30 900 0,53% 6 20,000 0,10 2,000 1,18% 7 10,000 11,8% Total usage 169,000

Percentage in total usage (%) Step 3 Item number Cumulative % of items Annual quantity used Unit value Usage per year Percentage in total usage (%) Cumulative % of total 2 14% 150,000 0,9 135,000 79,8% 7 29% 10,000 20,000 11,8% 91,6% 1 42% 75 80 6,000 3,51% 95,11% 4 56% 18,000 0,20 3,600 2,1% 97,21% 6 71% 0,10 2,000 1,18% 98,39% 3 84% 500 3,0 1,500 0,87% 99,46% 5 100% 3,000 0,30 900 0,53% Total usage 169,000

Step 4 Items Percentage of items Percentage of usage (%) Action Cathegory Items Percentage of items Percentage of usage (%) Action Class A items 2 15% 79,8% Close control Class B items 7, 1 30% 15,31% Regular review Class C items 3, 4, 5, 6 55% 4,89% Infrequent review

Example Table on the next slide gives the description, annual consumption, and price per unit of 20 items in the inventory of a Chemical company.

Camphor 80 40/kg Easter gum 50 8/kg Amyl A 20 10/kg Cartons 2000 Item Description Annual Consumption Cost per unit (Rs) Nitric Acid 4000 10/lit Xylene 600 10/kg Drums 2000 16/No Paraffin wax 3500 1/kg Biolac 50 8/kg Methylene Chloride 6000 6/kg Ethyl A 2400 5/kg D spent 4200 1/lit Handrast Castor OIL 100 7/kg Item Description Annual Consumption Cost per unit (Rs) Camphor 80 40/kg Easter gum 50 8/kg Amyl A 20 10/kg Cartons 2000 0.15/pc Linseed Oil 30 6/kg Talc Powder 0.25/kg Red Oxide 200 0.5/kg Toulene 750 4/kg Butyl Acetate 350 Alstat

Step 1 Determine the annual usage of each item for the past one year Annual Usage=Annual consumption X Price per unit (Rs) (Units) (Rs)

Cost per unit (Rs) 4000 10/lit 40000 600 10/kg 6000 2000 16/No 32000 Item Description Annual Consumption Cost per unit (Rs) Annual Usage (Rs) Nitric Acid 4000 10/lit 40000 Xylene 600 10/kg 6000 Drums 2000 16/No 32000 Paraffin wax 3500 1/kg Biolac 50 8/kg 400 Methylene Chloride 6/kg 36000 Ethyl A 2400 5/kg 12000 D spent 4200 1/lit Handrast 500 Castor OIL 100 7/kg 700 Item Description Annual Consumption Cost per unit (Rs) Camphor 80 40/kg 3200 Easter gum 50 8/kg 400 Amyl A 20 10/kg 200 Cartons 2000 0.15/pc 300 Linseed Oil 30 6/kg 180 Talc Powder 0.25/kg Red Oxide 0.5/kg 100 Toulene 750 4/kg 3000 Butyl Acetate 350 2100 Alstat

Step 2 Rank from 1 to 20 each material according to the amount of annual usage- 1 being assigned to the material with highest cost, 20 being least

Nitric Acid 40000 1 Xylene 6000 5 Drums 32000 3 Paraffin wax 3500 7 Item Description Annual Usage (Rs) Rank Nitric Acid 40000 1 Xylene 6000 5 Drums 32000 3 Paraffin wax 3500 7 Biolac 400 13 Methylene Chloride 36000 2 Ethyl A 12000 4 D spent 4200 6 Handrast 500 12 Castor OIL 700 11 Item Description Annual Usage (Rs) Rank Camphor 3200 8 Easter gum 400 14 Amyl A 200 16 Cartons 300 15 Linseed Oil 180 18 Talc Powder 20 Red Oxide 100 19 Toulene 3000 9 Butyl Acetate 2100 10 Alstat 17

Step 3 Arrange in Ascending order of their rank

Nitric Acid 40000 1 Methylene Chloride 36000 2 Drums 32000 3 Ethyl A Item Description Annual Usage (Rs) Rank Nitric Acid 40000 1 Methylene Chloride 36000 2 Drums 32000 3 Ethyl A 12000 4 Xylene 6000 5 D spent 4200 6 Paraffin wax 3500 7 Camphor 3200 8 Toulene 3000 9 Butyl Acetate 2100 10 Item Description Annual Usage (Rs) Rank Castor OIL 700 11 Handrast 500 12 Biolac 400 13 Easter gum 14 Cartons 300 15 Amyl A 200 16 Alstat 17 Linseed Oil 180 18 Red Oxide 100 19 Talc Powder 20

Step 4 Classify 70% usage- A category 20% usage- B category 10% usage- C category

Analysis A Category items- Nitric Acid, Methylene Chloride, B Category items- Drums, Ethyl A, Xylene, Spent D C Category items- Rest all

Conclusion The boundary between class A and class B might not be as sharply defined; The purpose of this classification is to ensure that purchasing staff use resources to maximum efficiency by concentrating on those items that have the greatest potential savings → selective control will be more effective than an approach that treats all items identically.

Selective Control- Control by Exception Uniform treatment of all items gives diffused effect and is also expensive Various methods of classification are available. These are: ABC- Emphasizes annual usage of materials XYZ- Emphasizes on inventory Value VED- Emphasizes criticality of the part HML-Utilizes price criterion FSN- Utilizes consumption pattern SDE- Relies on problems faced in procurement Items should be classified so that the major portion of effective management time is spent on those materials which are more important than others

Classification of inventories Technique Basis Main Use ABC (always better control) Value of Conception To control raw materials, components and WIP inventories in the normal course of business HML (high, medium, low) Unit price of the material Mainly to control purchase XYZ Value of the items in storage To review the inventories and their uses at scheduled intervals VED (Vital, essential, desirable) Criticality of the component To determine the stocking level of spare parts FSN (Fast moving, slow moving, non moving) Consumption of pattern of the components To control Obsolescence SDE (Scarce, difficult, easy to obtain) Problems faced in procurement Lead time analysis and purchasing analysis SOS (seasonal, off seasonal) Nature of supplies Procurement/holding strategies for seasonal items

POLICY IMPLICATIONS OF SELECTIVE INVENTORY CONTROL ABC analysis A class items need continuous rigourous control (use of mathematical models justified) B class items – relaxed control (periodic review) C class items – simple rules of thumb V class items call for a high level of service E class items call for medium level of service D class items call for tolerable level of service jointly determine service levels VED analysis % risk Of shortage (min) (max)  ABC VED FSN analysis Fast  most inventory models apply to this class Slow ( spare parts etc) Non – moving (dead stock) (optimal stock disposal rules)

Important Considerations All items that the company consumes should be considered together while making ABC analyses Though generally annual consumption figures are considered for ABC analysis, yet it is not necessary Though classification of items into 3 categories A, B, C is adequate for control, yet if required the items can be classified into more than 3 categories like A, B, C1, C2, C3 etc. Combinations of two techniques also possible. Eg ABC and VED, ABC and XYZ

XYZ One of the ways to classify items is based on Predictability (XYZ Analysis). Items which have Uniform demand as X, Varying demand as Y Abnormal demand as Z

Challenge

XYZ

XYZ

ABC/ XYZ AX, BX, CX, AY, BY, CY are suitable for fully automatic computerized processing, whereas AZ, BZ and CZ should be scheduled manually. AX, BX, AY, BY and AZ are in general suitable for Just-In-Time (JIT) deliveries. AZ and BZ products have a large share in revenue. However, they are difficult to control and they need special attention.

XYZ analysis It is based on the value of inventory stored. X items are with high and Z are those whose inventory stock are low. Y are those which have moderate inventory stocks. Helps identifying items for which huge amount is locked up in stock and hence can be reduced. XYZ can be combined with ABC analysis as given below Class of items A B C X Efforts to be made to reduce stocks to Z Efforts to be made for reducing upto Y Steps to be taken for disposing surplus stocks Y Efforts to convert into Z category - Control may be further tightened Z Stocks level may be reviewed twice a year

Thank you Any questions?