The company believes that it might have some inefficiencies in its inventory man
ID: 458577 • Letter: T
Question
The company believes that it might have some inefficiencies in its inventory management process. Develop an ABC classification system for the following 10 items. Based on this information, what do you recommend for improving inventory management?
Item
Annual Demand
Cost/Unit
I5
1750
10.00
D1
6000
10.00
A2
3000
50.00
E9
1000
20.00
J8
2500
5.00
C7
1500
45.00
B8
4000
12.00
G2
300
1500.00
H2
600
20.00
F3
500
Item
Annual Demand
Cost/Unit
I5
1750
10.00
D1
6000
10.00
A2
3000
50.00
E9
1000
20.00
J8
2500
5.00
C7
1500
45.00
B8
4000
12.00
G2
300
1500.00
H2
600
20.00
F3
500
Explanation / Answer
The solve the above question on invetory ABC classification is applied. In ABC classification, the total no of items in the inventory is devided into three groups A, B and C.
The items are devided into three groups based on the total cost (Anual demand x cost/unit) of item as per the anual demand.
A - 1st 70 % of the total cost (items with top 70 value when arranged in descending order as per total cost).
B - Next 20 % items after Class A items when arranged in descending order.
C - Final 10 % items by cost.
In the above question, ABC classification can be done as per pelow calculation.
Items in all the three class would be
A - G2, A2
B - C7, D1, B8
C - E9, I5, J8, H2, F3
It is recommended that compay should order only the required qty of items of class A, which would decrease the blockage of working capital. Should order class B material as per the past trend and can have some invetory. And company can have sufficient buffer for class C products. As the no of items are more but value is only 6% of total value.
Item Annual Demand Cost/Unit Total Cost Cumulative Cost % of Total Cost G2 300 1500 450000 450000 53.41% A A2 3000 50 150000 600000 71.22% C7 1500 45 67500 667500 79.23% D1 6000 10 60000 727500 86.35% B B8 4000 12 48000 775500 92.05% E9 1000 20 20000 795500 94.42% I5 1750 10 17500 813000 96.50% J8 2500 5 12500 825500 97.98% C H2 600 20 12000 837500 99.41% F3 500 10 5000 842500 100.00%