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

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 % 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. (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

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

7. 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);

8. 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.

9. 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

10. 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

11. 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

12. 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

13. 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

14. 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

15. 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

16. 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.

17. 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.

18. 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.

19. 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.

20. 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.

21. 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.

22. 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.

23. 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.

24. 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

25. 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.

26. 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.

29. 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

30. 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

31. 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

32. 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

33. 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

34. 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

35. 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.

36. 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

37. 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)

38. 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

39. 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

40. 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

41. Step 3
Arrange in Ascending order of their rank

42. 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

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

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

45. 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.

46. 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

47. 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

48. 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)

49. 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

50. 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

52. Challenge

53. XYZ

54. XYZ

55. 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.

56. 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

58. Thank you
Any questions?