1. Inventory Management & Model Theory Certified Professional Logistician
This topic is on Inventory Management and model theory. There will be some high level mathematical derivations in this topic. If you have the math background to understand the theory, the theory can become more meaningful. However, even if you cannot follow the mathematical derivations, the mathematics enclosed in rectangles within the derivations yield outcomes with a potential application to learn.
BERNARD PRICE
Certified Professional Logistician

2. Modeling Definitions Model: An abstraction/representation of reality
Purpose is for prediction
Develop understanding about real world process
Data: Representation of facts, concepts or instructions in a formalized manner
Suitable for communications & interpretation
Processed by human or automated means
This slide provides some introductory definitions. A model is an abstraction or representation of reality. The purpose of a model is for prediction. Models help to develop an understanding about a real world process.
Data is the representation of facts, concepts or instructions in a formalized manner. Data is suitable for communications and interpretation. Data is processed by humans or by automated means.

3. Modeling Model Data Processing Input Data Output Data
A model processes data. Input data is fed into the model for processing. Output data are outcomes from model data processing.
Although not illustrated in the picture, throughout data is input data provided again in the output data. This is just repetition of the same data in the output rather than an outcome of model data processing.

4. Modeling Information
The output of the model can only be as good as its input
The collection of accurate input data is therefore critical
Sensitivity Analysis: Varying questionable input data over a range of values to assess its impact on the output data
Based on the previous picture, it is easy to see that the output of the model can only be as good as its input even if the model theory is perfect. Therefore, the collection of accurate input data is critical.
Sometimes, some of the input data may vary to a large degree. When this occurs, a sensitivity analysis may be performed. A sensitivity analysis will vary questionable input data over a range of values to assess its impact on the output data. If sensitivity analysis modeled results change baseline results significantly, it becomes more critical for that input to be accurate.
For logistics support optimization models, predicted failure rates for systems or demand rates for items used to repair a system are typically used as input data in all of these models.

5. Model Types
Iconic: Using physical replica of the actual item example: Scaled down prototype
Analog: Using continuous variable data for abstraction of real world phenomena
example: Slide rules before calculators invented
Digital: Using discrete representation of data for the abstraction of real world phenomena
example: Calculator
Hybrid: Using continuous variable data & discrete data for abstraction of a real world phenomena example: Digital plotter
This chart lists 4 types of models. The first is the iconic model. The iconic model uses a physical replica of the actual item. A Scaled down prototype is an iconic model.
The analog model uses continuous variable data for an abstraction of a real world phenomena. During the 1960s before calculators were widespread, a slide rule was often used for multiplication, division and applying logarithms. The ruler is an analog device for measuring.
A digital Model uses discrete representation of data for the abstraction of a real world phenomena. The calculator and most computer programs apply digital models.
A hybrid Model uses both continuous variable data and discrete data for abstraction of a real world phenomena. The digital plotter or the processing of received sensor data by computer programs are considered hybrid models.

6. Digital Model Types
Simulation: The representation of certain features of behavior of a physical or abstract system by the behavior of another system
Processes are essentially sequential
Decisions are based on predetermined rules programmed into an automated evaluation procedure
Analytical: The mathematical representation of certain features or behavior of a physical or abstract system
Processes are essentially calculated utilizing equations
The digital model is the most commonly applied model in logistics today. There are two types of digital model computer programs.
One type of digital model is a simulation. A simulation model represents certain features of behavior of a physical or abstract system by the behavior of another system. In simulations, processes are essentially sequential. They may move from one state to another state over time. Any movement from one state to another state comes from decisions based on predetermined rules that are programmed into an automated evaluation procedure. Using a random number generator together with the probabilities of moving or not moving to another state is a typical example for making these decisions.
An analytical model provides the mathematical representation of certain features or behavior of a physical or abstract system. The analytical model processes are essentially calculated utilizing equations. The analytical model is the most common model used to optimize sustainment.

7. Inventory System Modeled Costs
Carrying Costs
Shortage Costs
Replenishment Costs
The inventory system model is a digital, analytical model. There are three inventory system costs modeled. They are Carrying Costs, Shortage Costs, and Replenishment Costs.

8. Carrying Costs
Investment Cost: Money tied up in inventory not invested elsewhere
Obsolescence
Technological
Over-forecasting of requirements
Deterioration
Pilferage
Taxes
Insurance
Warehousing
Handing
This chart covers the type of costs associated with carrying costs. One of the most important carrying costs is the investment cost. The investment cost is the cost of money tied up in inventory which is not invested elsewhere. For the Government, the money used to buy items for storage could conceivably have been used to buy down our debt for which the Government pays interest on this debt.
The obsolescence of stock in storage may come from engineering design changes or technological advances causing the item not to be used anymore, from the over-forecasting of requirements causing items to be sent to property disposal, or from the deterioration of the item over time from sitting in storage, like batteries.
Pilferage or loss of items in inventory is another applicable carrying cost. Taxes and insurance are carrying costs more applicable to industry. Warehousing and handling are part of the storage facility carrying costs.

9. Shortage Costs Overtime Cost Special clerical and administrative cost
Loss of Specific sales } Loss of present sales
Loss of goodwill } Loss of future sales
Loss of customers } Loss of future sales
Loss of end item usage
This chart covers the type of costs associated with shortage costs. Shortage costs are associated with being in a back order position. Attempts to improve this lack of inventory position, may lead to overtime costs or possibly special clerical and administrative costs.
When industry is out of stock, the loss of a present sale or the loss of future sales are associated with shortage costs. When the Government is out of stock, we may pay a premium for emergency buys and the lack of an item in stock will cause the loss of the item’s Next Higher Assembly (NHA) and possibly loss of end item usage. Therefore, the cost of the item’s NHA is often used as a shortage cost for repair parts in an Army model.

10. Replenishment Costs Ordering Cost: Setup Costs:
Clerical and administrative costs
Transportation costs
Handling costs
Setup Costs:
Labor setup costs
Cost of materials used during setup testing
Cost of time during which production cannot take place due to this setup
This chart covers the type of costs associated with replenishment costs. Replenishment costs are associated with the procurement of items for inventory. For the Government, ordering costs exist to buy items. The ordering cost typically covers the clerical and administrative costs for contractually placing an order, transportation costs for shipping the items from the supplier, and handling costs for receiving the items shipped and placing them in storage.
Setup costs are associated with the supplier of the item. Labor costs to set up the production line, the cost of materials used during setup testing, and the cost of time during which production cannot take place due to this setup are all part of the set up costs.

11. Procurement Demand Rate
Procurement Demand Rate Does Not Include Demands for Repair
Repair Costs Less Than Replenishment Buys Causing Repairs to be Pursued Before Purchasing Items
Applies Forecasted Demand Rate of Replenishment Buys for Best Model Input
Procurement Demands
Demand Rate associated with Throwaway Items
Certain Repairable Items Demands:
Item Not Returned by User or Field for Higher Level Repair
Item Washed Out Because Repair is Not Economical
If Demand Rate Data Includes Repairs, apply Unserviceable Return Rate and Washout Rate Factors to Estimate Replenishment Demand Rate
A procurement demand rate is associated with the buying and ordering of items. A procurement demand rate does not include demands for repair because repair costs are less than replenishment buys causing repairs to be pursued before purchasing items. A procurement demand rate applies the forecasted demand rate of replenishment buys.
Procurement demands are always associated with the demand rate of throwaway items. Procurement demands also apply to certain demands of repairable items. Items not returned by the user or the field of higher level repair need to be procured. Also, when an item is washed out because repair is sometimes not economical, the item will need to be procured. If the demand rate data happens to include repairs, the unserviceable return rate and washout rate factors are used to help estimate the replenishment demand rate.

12. The Basic Inventory Model
(Lot Size System)
Inventory Level q I1
The Basic Inventory Model of a lot size system considers only the carrying and replenishment costs. The graph of the inventory levels over time shows that the quantity of items in stock will reduce down to having no items in inventory. Once there is no stock, a batch replenishment quantity is received to take care of the continuing demands for the item.
Time (t) t

13. Demand rate is r quantity per unit time
Time (t)
Inventory Level q I1 t
Demand rate is r quantity per unit time
Replenishment size is the lot size q
t is the scheduling period
Replenishment rate per unit time is infinite
Replenishments are made whenever the inventory reaches the prescribed zero level
Replenishment lead time is zero
I1 the average amount carried in inventory
The demand rate is r quantity of items per unit time. r is represented by the downward slope on the graph. The replenishment size is a lot size q and t is the scheduling period between orders. r is equal to q divided by t on the graph.
The replenishment rate per unit time is shown to be infinite because the entire lot size q is received at the same time. Replenishments are made whenever the inventory reaches the prescribed zero level and the replenishment lead time is shown to be zero. I1 shows the average amount of items carried in inventory.

14. c is the total cost per unit time
Where:
c is the total cost per unit time
c1 is the unit carrying cost per unit time
c3 is the replenishment cost [$] $
The total cost of the lot size system is shown on this slide. The total cost per unit time is equal to the total carrying cost per unit time plus the replenishment cost per unit time. The average amount carried in inventory (I1) multiplied by the unit carrying cost per unit time (c1) yields the total carrying cost per unit time. The replenishment cost (c3) divided by the scheduling period between orders (t) yields the replenishment cost per unit time.

15. Economic Order Quantity
Cost vs. Quantity q0
c(q)
c1(q)
c3(q)
Cost
Quantity( Lot size)
Economic Order Quantity
(Optimal Lot Size)
Since the average amount in inventory is the lot size order quantity q divided by 2 and the scheduling period between orders is the lot size order quantity q divided by the demand rate r, the total cost of the lot size system is also equal to the equation in the rectangle.
Since the total cost is comprised of two costs dependent on the lot size order quantity q, the total cost vs. the quantity ordered is shown in the graph on the bottom of the slide. The order quantity with the lowest total cost is the Economic Order Quantity (EOQ). The optimal lot size, shown as q0 in the graph is considered the EOQ.

16. Economic Order Quantity
By differentiating c(q) and setting the equation equal to zero, a minimum cost lot size can be determined
To determine the Economic Order Quantity (EOQ) mathematically, the total cost equation as a function of q can be differentiated and set equal to zero to determine the optimal lot size quantity that yields the minimum total cost. This first step is shown as the top equation on this slide. The next 3 equations are intermediate steps to help determine the optimal lot size quantity.
The EOQ result is shown in the rectangle. The EOQ is equal to the square root of 2 times the demand rate r multiplied by the replenishment cost (c3) divided by the carrying cost per unit time (c1).

17. Economic Order Quantity
Note:
Where:
f is the carrying cost as a percentage of the unit price
p is the unit price of the item in inventory
The Economic Order Quantity (EOQ) equation is again shown on this slide. The carrying cost per unit time (c1) can be redefined in the EOQ formula. The annual holding cost factor multiplied by the unit price of the item yield the carrying cost per year. In the equation c1 = f multiplied by p, the annual holding cost factor f is the carrying cost as a percentage of the item’s unit price and p is the unit price of the item in inventory.
Therefore, the EOQ equation that may eventually be applied in the Logistics Modernization Program (LMP) and was applied in the Army Commodity Command Standard System (CCSS) prior to LMP is shown in the rectangle on the bottom of this slide.

18. CCSS C-E Holding Cost Factors
Storage Cost – 1%
Loss or Pilferage – 2%
Investment Opportunity or Discount Rate – 7%
For Government, should use Net Discount Rate
Cost to Pay Government Debt minus Inflation Rate
Obsolescence Rate
27.3% for year 1
6.9% for years 2 – 4
7.9% for years 4 – 12
9.8% for years 12 and beyond
Disposal Cost (End of Life Application Only) – 2%
The typical CCSS annual holding cost factors for C-E equipment is shown on this slide. The annual average storage cost was modeled as 1% of the item’s unit price. An item’s storage cost truly depends more on the item’s volume and its potential need for refrigerated storage, non-refrigerated indoor storage or outdoor storage. However, the cost per unit price used was likely determined form the total cost of storing C-E items divided by the total purchase costs for these C-E items.
The loss of pilferage rate was 2% per year. The lost investment opportunity or discount rate was 7% per year. For Government, the net discount rate probably should be used rather than just the discount rate because the item’s unit price tends to inflate over time. A net discount rate may be thought of as the cost to pay the Government’s debt minus the procurement cost inflation rate.
The largest carrying cost factor tends to be the obsolescence rate. The obsolescence rate tends to vary with the age of the item % of the items tend to become obsolete during their 1st year mainly due to design changes. The annual obsolescence rate of 6.9% applies for years After that, the obsolescence rate goes up with age. 7.9% was typically applied for years 4-12 and 9.8% was typically applied for years 12 and beyond. The average disposal cost of 2% of the unit price is more of an end of life application cost.

19. Lot Size System Model with Replenishment Lead Time
Time (t)
Inventory Level
R is the reorder point quantity
t2 is the lead time
to is the optimal scheduling period qo
The Lot Size System model with Replenishment Lead Time still considers only the carrying and replenishment costs. However, now we are establishing the reorder point quantity r and the procurement lead time t2. t0 is the optimal scheduling period associated to the purchase the Economic Order Quantity q0. Re-ordering should occur a procurement lead time prior to needing the order. I1 R t2
Reordering Occurs to
Order Received

20. Reorder Point Quantity
Time (t)
Inventory Level qo I1 to R t2
Reordering Occurs
Order Received
The reorder point quantity is the established level of inventory requiring order placement for the economic order quantity lot size
The reorder point quantity is the established level of inventory requiring order placement for the economic order quantity lot size. The reorder point quantity R is equal to demand rate r multiplied by the procurement lead time (t2).

21. Example
Suppose an inventory control problem has the following specifications for a particular item:
Demand rate: 25 units per week or 25 x 52 = 1300 units per year
Unit price = $5
Carrying cost factor = 20% per year
Replenishment cost = $40
Lead time = 4 weeks
Economic Order Quantity:
Reorder Point Quantity:
This example may help to visualize the Economic Order Quantity (EOQ) and reorder point quantity. Suppose an inventory control problem has the following specifications for a particular item. The demand rate is 25 units per week or 1300 units per year. The item’s unit price is $5. The inventory carrying cost factor is 20% of the item’s unit price per year. The procurement replenishment cost is $40 and the procurement lead time is 4 weeks.
The EOQ (q0) is calculated to be 322 units. The reorder point quantity (R) is calculated to be 100 units. Therefore, an order for 322 units should be placed when the current inventory falls to a 4 week supply of 100 units. Orders should be placed about 4 times per year.
An order for 322 units should be placed when the current inventory falls to a 4 week supply of 100 units.
Orders should be placed 1300 / 322 = 4.04 times per year

22. Order Level Lot Size System Model
Inventory Level S q I1
Time (t) I2
The order level lot size system model considers the carrying costs, replenishment costs and shortage costs. The graph of the inventory levels over time shows that the quantity of items in stock will reduce down to q minus S quantities in back order before a batch replenishment quantity q is received to take care of the continuing demands for the item.
S-q t1 t2 tp

23. I1 I2 S q S-q tp Demand rate is r (quantity per unit time)
Time (t)
Inventory Level q I1 tp I2 S
S-q t1 t2
Demand rate is r (quantity per unit time)
Replenishment size is the lot size q
Replenishment rate per unit time is infinite
Replenishment lead time is zero
I1 is the average amount carried in inventory
tp is the scheduling period
S is the order level
Replenishments are made whenever q-S backorders are reached
I2 is the average shortage amount
In this model, the demand rate is still quantity per unit time, the replenishment size is still the lot size q, the replenishment rate per unit time is infinite, the replenishment lead time is zero and I1 is still the average amount carried in inventory.
However, now tp is the scheduling period, where t1 represents the amount of time not in back order and t2 represents the amount of time in back order. S is the order level or inventory requirement objective to seek when ordering a replenishment quantity q. With no lead time, replenishments are made whenever q-S backorders are reached. I2 is the average shortage amount of items.

24. & & Where: c is the total cost per unit time
c1 is the unit carrying cost per unit time
c2 is the unit shortage cost per unit time
c3 is the replenishment cost [$] $ $
Note:
&
&
The total cost of this lot size system is shown on this slide. The total cost per unit time is equal to the sum of the total carrying cost per unit time, the total shortage cost per unit time, plus the replenishment cost per unit time. The average back order amount (I2) multiplied by the unit shortage cost per unit time (c2) yields the total shortage cost per unit time.
Due to proportionality along the right triangle in the graph. The scheduling period (tp) is still equal to q divided by r. The average amount carried in inventory (I1) is now computed to be S squared divided by 2 times q. The average amount in back order (I2) is now computed to be the quantity q minus S squared divided by q times 2. The total cost is comprised of 3 costs dependent on the replenishment order lot size q and the inventory requirement objective order level S.

25. Reorder Point Quantity:
By taking the partial derivative with respect to S, a minimum cost order level can be determined in terms of a minimum cost lot size.
Reorder Point Quantity:
By taking the partial derivative with respect to S and setting the equation equal to zero, a minimum cost order level can be determined in terms of the minimum cost replenishment lot size. The resulting equation in the rectangle at the top half of this slide shows that the optimal inventory requirement objective order level S0 is equal to the EOQ multiplied by the unit shortage cost divided by the sum of the unit shortage plus carrying costs. In an Army standard inventory model, the carrying cost c1 is dependent on the unit price of the item and the shortage cost c2 is dependent on the unit price of the item’s Next Higher Assembly.
With the lead time of zero, the optimal reorder point quantity is when there is a back order quantity equal to the EOQ minus the optimal requirement objective order level S0. By substituting the S0 equation at the top half of that of this slide, the optimal reorder point equation is derived at the bottom half of this slide. The resulting equation in the rectangle at the bottom half of this slide shows the reorder point to be equal to the negative value of the EOQ multiplied by the unit carrying cost divided by the sum of the unit shortage plus carrying costs.

26. By taking the partial derivative with respect to q, the minimum lot cost lot size can be determined.
By taking the partial derivative with respect to q and setting the equation equal to zero, the minimum cost lot size or Economic Order Quantity (EOQ) can be determined. The resulting equation in the rectangle shows the EOQ to be equal to the square roots of 2 times the demand rate r multiplied by the replenishment cost (c3) multiplied by the sum of the carrying cost (c1) plus the shortage cost (c2) divided by the carrying cost (c1) times the shortage cost (c2).
When considering shortage costs, the previous EOQ that did not consider shortage costs is increased by the factor of the square root of the sum of the unit carrying plus shortage costs divided by unit shortage cost.

27. Reorder Point Quantity without replenishment lead time:
Reorder Point Quantity with replenishment lead time:
The reorder point quantity R without a replenishment lead time or the reorder point quantity with replenishment lead times can now be derived when accounting for shortage costs.
The reorder point quantity with a replenishment lead time adds in an additional quantity covering the demand rate r multiplied by the procurement lead time (t2).

28. Safety Levels
Safety stock is the extra quantity of stock carried as a protection against variable demand rates and a variable replenishment lead time as well as contingencies
Time (t)
Inventory Level
Safety Stock
Reorder Point
Inventory safety levels are needed because the demand rate actually fluctuates over time and the procurement lead time is also an average that fluctuates around the mean value. Contingencies, like conflicts may increase the operating usage of equipment, which in turn increases the demand rate per calendar time.
Safety stock is the extra quantity of stock carried as a protection against variable demand rates and a variable replenishment lead time as well a contingencies. Stocking for more than the average demand rate produces safety stock.
Stocking for more than the average demand rate produces safety stock

29. Normal Distribution 1σ 2σ 3σ Demand Quantity Mean Demand
Frequency of demand occurrences
Demand Quantity
Mean Demand 1σ 2σ 3σ
When there are many demands over a period of time, a Normal Distribution typically describes the frequency of demand occurrences around the mean demand. This chart pictures a Normal Distribution variation of demand occurrences around the Mean Demand value.

30. Normal Distribution Properties:
Frequency of demand occurrences
Demand Quantity
Mean Demand 1σ 2σ 3σ
Normal Distribution Properties:
The normal distribution is symmetrical about the mean
The mean represent half (50%) the area under the curve
The standard deviation is a measure of dispersion about the mean
The mean plus 1 standard deviation (σ) represents approximately 84% of the area under the curve
This slides lists some of the key Normal Distribution properties. The Normal Distribution is symmetrical about the mean. The mean represent half of (50%) the area under the curve. The standard deviation is the measure of dispersion about the mean. The mean plus 1 standard deviation represents approximately 84% of the area under the curve.

31. Usage of Normal Distribution to Determine Safety Level Stocks
Stocking for the mean demand is stocking to the 50% confidence level that the actual demand will not exceed mean demand over the specified time period
Stocking for the mean demand plus 1 standard deviation (σ) is stocking to the 84% confidence level. Therefore, the actual demand should not exceed the mean demand +1 σ more than 16% of the time over the specified time period
An order level equal to the mean demand plus X standard deviations is expected to prevent stock outs during Y% of the reorder periods
This chart continues on the usage of the Normal Distribution to determine safety level stocks. Stocking for the mean demand is stocking to the 50% confidence level that the actual quantity of demands will not exceed the mean demand over the specified time period.
Stocking for the mean demand plus 1 standard deviation is stocking to the 84% confidence level. Therefore, the actual quantity of demands should not exceed the mean demand +1 standard deviation more than 16% of the time over the specified time period.
The table at the bottom of this chart shows that an order level equal to the mean demand plus X standard deviations is expected to prevent stock outs during Y% of the reorder periods.

32. Calculation of Mean & Standard Deviation
Example: xi i
This slide provides an example of how to calculate the Mean Demand and Standard Deviation used in a Normal Distribution. The mean value is equal to the sum of the number of demands or the occurrences over n time periods divided by n periods of time. In this example, the total number of actual demands over the 6 reorder periods is 1140 demands. The mean or average demand rate is 190 demands per reorder period.
The standard deviation value is equal to the square root of the variance around the mean value. The variance is determined by summing the squared differences of the actual number of occurrences relative to the mean number of occurrences and dividing the result by n-1 time periods of data. In the example, the total of the squared differences is 15,400 demands squared. The average variance is 15,400 divided by 5 or 3080 demands squared. Taking the square root of this variance, a standard deviation of 55.5 demands around the 190 mean demands is determined.
Standard Deviation:
Mean Demand:

33. Inventory Quantity Buildup
IMPACTED BY
LEAD-TIME
INVENTORY ELEMENTS
INV REQUIREMENT
ON ORDER QTY*
ON-HAND QTY
INSURANCE / RESERVE STOCK X NO
SAFETY LEVEL STOCK X YES
RECEIVE ORDER
ADMINISTRATIVE LEAD TIME X YES
PRODUCTION LEAD TIME X YES
REORDER POINT
RE ORDER QUANTITY ECONOMIC ORDER QUANTITY X NO
REQUIREMENT OBJECTIVE
UNFUNDED INSURANCE / RESERVES X NO
ECONOMIC RETENTION X NO
MAX RETENTION LIMIT
EXCESS TO DISPOSAL
The inventory buildup on this chart represents a requirements stratification. When replenishing consumable stock, an order is supposed to be placed when the amount of inventory stock on-hand plus the amount of future stock on-order drops down to the reorder point quantity. The Economic Order Quantity (EOQ) is desired to be the minimum total ownership cost purchase quantity. The EOQ circled on this chart replenishes inventory from Order Receipt to the Requirement Objective Quantity.
The reorder point starts by covering any Insurance or Reserve Stock initially placed at the wholesale supply level to cover critical contingencies like war, which causes a surge in demands for the item. Safety Level stock is needed to cover the variability in demand rates and Procurement Lead Time variability. The Procurement Lead Time is the sum of the Administrative Lead Time (ALT) and Production Lead Time (PLT). The ALT is the buyer’s response time covering the time from when the order is required to when the procurement contract is placed. The PLT is the seller’s response time from when the contract order is placed to when the customer receives the procured item shipment.
The portion of this chart higher than the Requirement Objective quantity occurs when the on-hand and on-order stock exceeds this requirement. This stock may be retained to cover reserve stock that originally was not funded. Extra stock may also be retained when it is economically smart to hold the extra stock to preclude buying more items in the far future. The maximum retention limit is where the holding cost for the excess quantity equals the potential purchase cost. Quantities in stock above the maximum retention limit should be sent to disposal.

34. ABC Inventory Concept
A small number of items will account for most of the sales or cost dollars and therefore are the most important ones to control
Example Classification
The ABC Inventory Concept for controlling and managing inventory is introduced on this slide. The ABC ranking concept is based on the premise that a small number of items will account for most of the sales or cost. Therefore, the small number of items that impact the total cost of inventory the most are the important ones to control and manage. These type of items are classified as A items.
There is also a large number of items that will account for a small amount of the sales or dollar costs, which are less important to control or manage. These type of items are classified as C items. The medium number of items that account for the medium amount of the sales or dollar cost are classified as the B items.
The example classification on this slide is notional. The notional example says that 15% of all the items classified as A impact 65% of the total dollars, 35% of all the items classified as B impacts 20% of the total dollars, and 50% of all the items classified as C impacts just 15% of the total dollars.

35. ABC Classification of 14 products of a chemical company
Classification of items by ABC method
ABC Classification of 14 products of a chemical company A B C
This slide shows an ABC concept example taken out of a text book. ABC classification starts by rank ordering the items from the greatest number of sales down to the least number of sales. This is the same as using the Excel spreadsheet and sorting all the data in the spreadsheet by the monthly sales column in descending order.
Looking at the cumulative percentages of the total sales column, a decision can then be made about classifying the items into A, B and C groupings. In this example classification, 14.3% of the products with 60.7% of the sales are classified as A items, 35.7% of products with 28.5% of the sales are classified as B items, and 50% of the products with just 10.8% of the sales are classified as C items.
The ABC classification is made by multiplying the annual usage of each product by its dollar value and then ranking these in descending order

36. ABC Inventory Management Concept
Expend minimal time & effort managing the low value “C” items
Carry plenty of low value items in stock
Use minimal control & monitoring
Apply maximum time & effort to closely control high value “A” items
Extra management decreases cost of high value items in stock
Use maximum control & frequent reporting of inventory status
Expend a medium amount of time & effort managing medium value “B” items
Medium management cost for medium value items in stock
Use moderate control & reporting of inventory status
With the ABC Inventory Management Concept, it is recommended to expend minimal time and effort in managing the low value “C” items. This can be done by carrying plenty of low value items in stock and using minimal control and monitoring.
The ABC Inventory Management concept recommends applying the maximum time and effort to closely control the high value “A” items. This extra management helps to decrease the cost of high value items in stock by using maximum control and the frequent reporting of inventory status.
The ABC concept recommends expending a medium amount of time and effort managing medium value “B” items. This yield a medium management cost for medium value items in stock and uses, moderate control and reporting of the inventory status.

37. C-E LCMC Business Rule Guidelines
Runner
Repeater
Stranger
Ghost
Demand Frequency
150 + Demands/yr (1560 avg.)
500+ Qty/yr
Demands/yr (62 avg.)
100+ Qty/yr
Demands/yr (6 avg.)
No Demands/yr
Unit Price A
Use frequent deliveries against a contract to minimize high-value stock
Hold minimal stock levels due to high item cost and low demand
$10,000 +
Demand forecasts must be reviewed frequently
Tight controls on supply - monthly cycle counting
High volume allows for minimal stock levels
Regular review of forecasts – to protect against unexpected demand
Requires moderate controls on supply – Cycle count semi-annually B
Demand forecasts must be reviewed regularly against variability in demand
Inventory levels should be balanced against economic and Management levels
Moderate controls on supply – Cycle count quarterly
$2,500 - $9,999 C
$100 – $2,499
This slide contains Communication-Electronics Life Cycle Management Command (C-E LCMC) Business Rule Guidelines, which applies an A,B,C,D Inventory Management Concept. The C-E LCMC Business Rule Guidelines are based on both the item’s unit price and the item’s Demand Frequency. The D items are generally consumable items managed by the Defense Logistics Agency (DLA) rather than C-E LCMC managed items. D
Low cost allows for larger stock levels to protect against stock-outs
Do not forecast demand for these items
Minimal supply controls – Cycle count yearly
Low demand requires strategic stock levels
Do not forecast demand for these items
Minimal supply controls – Cycle count yearly
$.01 - $99.99