1. Best Practice in Inventory Management
SHaping Inventory
Chapter 3
Dr Tony Wild

2. Figure 3.1 Pareto curve Effect % Cause % 0% 10% 20% 30% 40% 50% 60%
70%
80%
90%
100% 10 20 30 40 50 60 70 80 90
100
Cause %
Effect %
Best Practice in Inventory Management
Dr Tony Wild

3. ABC Analysis
Best Practice in Inventory Management
Dr Tony Wild

4. Figure 3.3 ABC Inventory Control
CHARACTERISTICS
POLICY
METHOD
A ITEMS
Few items
Most of turnover
Tight control
Personal Supervision
Communication
JIT approach - balanced safety
stock
Frequent monitoring
Accurate records
Sophisticated forecasting
Service level policy
B ITEMS
Important items
Significant turnover
Lean stock policy
Use classic stock control
Fast appraisal method
Manage by exception
Rely on sophisticated method
Calculated safety stocks
Limit order value
Computerised Management &
exception reporting
 C ITEMS
Many items
Low turnover value
(Few movements or low value items)
Minimum supervision
Supply to order where possible
Large orders
Zero or high safety stock policy
Simple system
Avoid stockouts & excess
Infrequent ordering
Automatic system
Best Practice in Inventory Management
Dr Tony Wild

5. Example of Pareto Analysis
Figure 3.4
Example of Pareto Analysis
Best Practice in Inventory Management
Dr Tony Wild

6. Figure 3.5 Classification by Usage Value
Item
Annual
Usage
(units)
Unit
Cost
(£)
Turnover
(%)
Rank
Class
Cumulative
Percentage
F67
394 12
4728
66.6 1 A
B23
105 11
1155
16.3 2 B
82.9
H89
500
7.0 3
89.9
D45 50 5
250
3.5 4 C
93.4
A12 21 7
147
2.1
95.5
E56 9 14
126
1.8 6
97.3
J01 25 75
1.1
98.4
I90 44
0.6 8
99.0
G78 40
99.6
C34 15 30
0.4 10
100
Total
7095
Best Practice in Inventory Management
Dr Tony Wild

7. Figure 3.6 Summary of ABC Analysis
Classification
Percentage of
Items*
Value
Value Per Class A
10.0
66.6
4728 B
20.0
23.3
1655 C
70.0
10.1
712
Total
100.0
7095
Best Practice in Inventory Management
Dr Tony Wild

8. Figure 3.7 The Cumulative Pareto Curve
Sequence of items
Best Practice in Inventory Management
Dr Tony Wild

9. Best Practice in Inventory Management
Dr Tony Wild

10. Stock cover in weeks (or days)
Figure 3.5 Theoretical and Actual Inventory Profiles
Number of lines
Stock cover in weeks (or days)
Best Practice in Inventory Management
Dr Tony Wild

11. Figure 11a ABC Stock Balance
Class
Number of Items
Value of turnover
Stock Cover
Average stock value
Av Delivery Frequency
Number of deliveries %
Weeks
Annually A 10 65
1.5
0.975 3
173 B 20 25
0.75 4
260 C 70 6
0.6 12
303
Total Delivery Quantity Stock
2.325
737
Best Practice in Inventory Management
Dr Tony Wild

12. Reduction in Inventory Value
Figure 11b
19% reduction in Inventory Value by more frequent A class supply
Class
Number of Items
Value of turnover
Stock Cover
Average stock value
Av Delivery Frequency
Number of deliveries %
Weeks
Annually A 10 65
0.5
0.325 1
520 B 20 25 3
0.75 4
260 C 70 8
0.8 16
228
Total Delivery Quantity Stock
1.875
1008
Reduction in Inventory Value
19%
Per 100 total lines
Best Practice in Inventory Management
Dr Tony Wild

13. Reduction in inventory
Figure 11c
5% reduction in Inventory Value maintaining similar workload
Class
Number of Items
Value of turnover
Stock Cover
Average stock value
Av Delivery Frequency
Number of deliveries %
Weeks
Annually A 10 65 1
0.65 2
260 B 20 25 3
0.75 4 C 70 8
0.8 16
228
Total Delivery Quantity Stock
2.2
748
Reduction in inventory 5%
Per 100 total lines
Best Practice in Inventory Management
Dr Tony Wild