ABC & XYZ

ANALYSIS
Ahmed Atif, MMS(Operations)
Inventory Management
Definition: The planning and controlling of inventories in
order to meet the competitive priorities of the organization
 Effective Inventory Management is essential for

realizing the full potential of any Value Chain

 Inventories are important to all types of organizations

and their employees and affect everyday operations

because they must be counted, paid for, used in operations,
used to satisfy customers and managed
 Pressures of High and Low
Inventory
 If some critical inventories are not
detained, there could be an
administrative delay.
 On the other hand, detaining
inventories for a prompt availability
can entail, in case of expensive and
rarely used parts, high inventory
holding costs.
 Our aim is to find the right
compromise between the two which is
more economic.
 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
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, Criticality of the component To determine the stocking level of spare parts
desirable)
FSN (Fast moving, slow Consumption of pattern of the To control Obsolescence
moving, non moving) components
SDE (Scarce, difficult, easy to Problems faced in procurement Lead time analysis and purchasing analysis
obtain)
SOS (seasonal, off seasonal) Nature of supplies Procurement/holding strategies for seasonal
items
 ABC Analysis

 Items held in inventory are not of equal

importance in terms of Rupees invested, A --------Very Important
profit potential, sales or usage volumes or B ---------Moderately
stock out penalties. Important
 The ABC approach classifies inventory C ---------Least Important
items according to the measure of
The actual number of
importance, usually annual $/Rupee usage categories may vary from org.
(value multiplied by usage rate, and then to org.,
allocates control efforts accordingly
  A items should receive close attention
Attention/Control through frequent reviews of amounts
on hand and control over withdrawals
where possible, to make sure that
A Category
B Category
customer service levels are attained
C Category  C items should receive loose control
(2 bin system, bulk order etc)
 B items should be between A and C
 Statistics reveal that  A- 5 to 10% of the items account
just a handful of items for 70-75% 0f the total money spent
account for bulk of the on materials
annual expenditure on  B- 10 to15% of total items represent
materials 10-15% of total expenditure
 C- 70 to 80% of the items represent
5-10% of total expenditure
A
N
N A Items

U HIG A
A H Items
L

R
U Aspect Ratio
P Test B
E Items
E (Should appear
circular)

V
O
L C
LOW
U Items
M
E
16x9
FEW MANY
NUMBER OF ITEMS
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
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.
Item Description Annual Consumption Cost per unit (Rs) Item Description Annual Cost per unit (Rs)
Consumption
Nitric Acid 4000 10/lit
Camphor 80 40/kg
Xylene 600 10/kg
Easter gum 50 8/kg
Drums 2000 16/No
Amyl A 20 10/kg
Paraffin wax 3500 1/kg
Cartons 2000 0.15/pc
Biolac 50 8/kg
Linseed Oil 30 6/kg
Methylene 6000 6/kg
Talc Powder 80 0.25/kg
Chloride
Red Oxide 200 0.5/kg
Ethyl A 2400 5/kg
Toulene 750 4/kg
D spent 4200 1/lit
Butyl 350 6/kg
Handrast 50 10/kg Acetate
Castor OIL 100 7/kg Alstat 20 10/kg
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)
 Item Annual
Cost per Annual Item Annual Cost per unit
Description Consumption Usage (Rs) Description Consumption (Rs)
unit (Rs)
Camphor 80 40/kg 3200
Nitric 4000 10/lit 40000
Acid Easter 50 8/kg 400
gum
Xylene 600 10/kg 6000
Amyl A 20 10/kg 200
Drums 2000 16/No 32000 Cartons 2000 0.15/pc 300
Paraffin 3500 1/kg 3500 Linseed 30 6/kg 180
wax Oil
Biolac 50 8/kg 400 Talc 80 0.25/kg 20
Methylene 6000 6/kg 36000 Powder
Chloride Red Oxide 200 0.5/kg 100
Ethyl A 2400 5/kg 12000 Toulene 750 4/kg 3000
D spent 4200 1/lit 4200 Butyl 350 6/kg 2100
Handrast 50 10/kg 500 Acetate
Alstat 20 10/kg 200
Castor 100 7/kg 700
OIL
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
Item Annual Rank
Description Usage (Rs) Item Description Annual Usage (Rs) Rank

Nitric Acid 40000 1 Camphor 3200 8

Xylene 6000 5 Easter gum 400 14
Drums 32000 3 Amyl A 200 16
Paraffin 3500 7 Cartons 300 15
wax
Linseed Oil 180 18
Biolac 400 13
Talc Powder 20 20
Methylene 36000 2
Chloride Red Oxide 100 19
Ethyl A 12000 4 Toulene 3000 9
D spent 4200 6 Butyl 2100 10
Acetate
Handrast 500 12
Alstat 200 17
Castor OIL 700 11
Step 3

Arrange in Ascending order of their rank

Item Annual Rank
Description Usage (Rs)
Item Description Annual Usage (Rs) Rank
Nitric Acid 40000 1
Methylene 36000 2 Castor OIL 700 11
Chloride Handrast 500 12
Drums 32000 3 Biolac 400 13
Ethyl A 12000 4 Easter gum 400 14
Xylene 6000 5
Cartons 300 15
D spent 4200 6
Amyl A 200 16
Paraffin 3500 7
wax Alstat 200 17
Camphor 3200 8 Linseed Oil 180 18
Toulene 3000 9 Red Oxide 100 19
Butyl 2100 10 Talc Powder 20 20
Acetate
Step 4
Classify
70% usage- A category
20% usage- B category
10% usage- C category
 Analysis
 A Category items- Nitric Acid, Methylene Chloride,
 B Category items- Drums, Ethyl A, Xylene, Spent D
 C Category items- Rest all
 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
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 Efforts to be made for Steps to be taken for

stocks to Z reducing upto Y disposing surplus stocks

Y Efforts to convert into Z - Control may be further

category tightened
Z - Stocks level may be reviewed -
twice a year
THANK YOU
Any questions?