1. Stock analysis classification
ABC analysis
XYZ analysis and the others
EOQ , ROP
Stock analysis classification

2. 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.

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

4. 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% !)

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

6. 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);

7. 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.

8. 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

9. 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

10. 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 * annual demand

11. 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

12. 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

13. 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

14. 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

15. 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.

16. 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.

17. 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.

18. 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.

19. 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.

20. 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.

21. 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.

22. 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

23. Step 1 Item number Annual quantity used Unit value Usage per year 1 7580
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

24. 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

25. 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

26. 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

27. 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.

28. Alternative Classification Schemes
ABC Classification (on the basis of consumption value)
XYZ Classification (on the basis of unit cost of the item)
High Unit cost - Medium Unit cost - Low unit cost
FSN Classification (on the basis of movement of inventory)
Fast Moving - Slow Moving Non-moving
VED Classification (on the basis of criticality of items)
Vital - Essential - Desirable
On the basis of sources of supply
Imported - Indigenous (National Suppliers)- Indigenous (Local Suppliers)

29. 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)

30. EOQ Model Economic Order Quantity

31. EOQ Assumptions Known & constant demand Known & constant lead time
Instantaneous receipt of material
No quantity discounts
Only order (setup) cost & holding cost
No stockouts

32. Inventory Holding Costs Reasonably Typical Profile
% of Category Inventory Value
Housing (building) cost 6% Material handling costs 3% Labor cost 3% Inventory investment costs 11% Pilferage, scrap, & obsolescence 3% Total holding cost 26%

33. EOQ Model
Annual Cost
Order Quantity

34. EOQ Model
Annual Cost
Holding Cost
Order Quantity

35. Why Order Cost Decreases
Cost is spread over more units
Example: You need 1000 microwave ovens
1 Order (Postage $ 0.35)
1000 Orders (Postage $350)
Purchase Order
Purchase Order
Purchase Order
Purchase Order
Description
Qty.
Purchase Order
Description
Qty.
Description
Qty.
Description
Qty.
Microwave
1000
Description
Microwave
Qty. 1
Microwave 1
Microwave 1
Microwave 1
Order quantity

36. EOQ Model
Annual Cost
Holding Cost
Order (Setup) Cost
Order Quantity

37. EOQ Model Annual Cost Total Cost Curve Holding Cost Order (Setup) Cost
Order Quantity

38. Optimal Order Quantity (Q*)
EOQ Model
Annual Cost
Total Cost Curve
Holding Cost
Order (Setup) Cost
Order Quantity
Optimal Order Quantity (Q*)

39. EOQ Formula Derivation
D = Annual demand (units)
C = Cost per unit ($)
Q = Order quantity (units)
S = Cost per order ($)
I = Holding cost (%)
H = Holding cost ($) = I x C
Number of Orders = D / Q
Ordering costs = S x (D / Q)
Average inventory
units = Q / 2
$ = (Q / 2) x C
Cost to carry
average inventory = (Q / 2) x I x C
= (Q /2) x H
Total cost = (Q/2) x I x C + S x (D/Q)
inv carry cost order cost
Take the 1st derivative:
d(TC)/d(Q) = (I x C) / (D x S) / Q²
To optimize: set d(TC)/d(Q) = 0
DS/ Q² = IC / 2
Q²/DS = 2 / IC
Q²= (DS x 2 )/ IC
Q = sqrt (2DS / IC)

40. Total cost = (Q/2) x I x C + S x (D/Q)
inv carry cost order cost
Take the 1st derivative:
d(TC)/d(Q) = (I x C) / (D x S) / Q²
To optimize: set d(TC)/d(Q) = 0
DS/ Q² = IC / 2
Q²/DS = 2 / IC
Q²= (DS x 2 )/ IC
Q = sqrt (2DS / IC)

41. Economic Order Quantity
D = Annual demand (units)
S = Cost per order ($)
C = Cost per unit ($)
I = Holding cost (%)
H = Holding cost ($) = I x C

42. EOQ Model Equations D = Demand per year
S = Setup (order) cost per order
H = Holding (carrying) cost
d = Demand per day
L = Lead time in days

43. EOQ Example You’re a buyer for SaveMart.
SaveMart needs 1000 coffee makers per year. The cost of each coffee maker is $78. Ordering cost is $100 per order. Carrying cost is 40% of per unit cost. Lead time is 5 days. SaveMart is open days/yr.
What is the optimal order quantity & ROP?

44. SaveMart EOQ EOQ = 80 coffeemakers D = 1000 S = $100 C = $ 78 I = 40%
H = C x I
H = $31.20
EOQ = 80 coffeemakers

45. SaveMart ROP ROP = 2.74 x 5 = 13.7 => 14
ROP = demand over lead time
= daily demand x lead time (days)
= d x l
D = annual demand = 1000
Days / year = 365
Daily demand = 1000 / 365 = 2.74
Lead time = 5 days
ROP = 2.74 x 5 = 13.7 => 14

46. Average (Cycle Stock) Inventory
SaveMart
Average (Cycle Stock) Inventory
Avg. CS = OQ / 2
= 80 / 2 = 40 coffeemakers
= 40 x $78 = $3,120
Inv. CC = $3,120 x 40% = $1,248
Note: unrelated to reorder point

47. Economic Order Quantity
D = Annual demand (units)
S = Cost per order ($)
C = Cost per unit ($)
I = Holding cost (%)
H = Holding cost ($) = I x C

48. What if … Interest rates go up ? Order processing is automated ?
Warehouse costs drop ?
Competitive product is introduced ?
Product is cost-reduced ?
Lead time gets longer ?
Minimum order quantity imposed ?

49. Economic Order Quantity
What if …
Interest rates go up ?
Order processing is automated ?
Warehouse costs drop ?
Competitive product is introduced ?
Product is cost-reduced ?
Lead time gets longer ?
Minimum order quantity imposed ?
Which of the factors are controlled by a company? Which are dependent on other stakeholders?

50. Economic Order Quantity
The XYZ Company purchases a component used in the manufacturing of automobile generators directly from the supplier.
XYZ's generator production operation, which is operated at a constant rate, will require 1,000 components per month throughout the year.
If ordering costs are $25.00 per order, unit cost is $2.50 per component, and annual inventory holding costs are charged at 20%, answer the following inventory policy questions for XYZ.  
What is the total cost if the order quantity defined by purchasing department is 1,000?
What is the EOQ for this component?
How much can be saved? (compare total cost for previous policy and EOQ)
What the cycle time in months?
What are the total annual inventory holding and ordering costs associated with your recommended EOQ?
Assuming 250 days of operation per year and a lead time of 5 days, what is the reorder point for the XYZ Company?