Inventory Management

Homework: ABC analysis

August 2017

Student number: A01370849 Name: Csar Vzquez Arzate

1. Perform the ABC analysis for the following information (30 points).

Annual Cumulative Cumulative % Cumulative

Part Annual Unit cost Annual Part
usage $ usage of $ usage % of items Class
number unit usage ($) $ usage number
($) ($) (%) (%)

1 21,000 1 21000 2 200000 200000 52.51 10 A

2 5,000 40 200000 5 100000 300000 78.76 20 A

3 1,600 3 4800 8 30000 330000 86.64 30 B

4 12,000 1 12000 1 21000 351000 92.15 40 B

5 1,000 100 100000 4 12000 363000 95.30 50 B

6 50 50 2500 10 5000 368000 96.61 60 C

7 800 2 1600 3 4800 372800 97.87 70 C

8 10,000 3 30000 9 4000 376800 98.92 80 C

9 4,000 1 4000 6 2500 379300 99.58 90 C

10 5,000 1 5000 7 1600 380900 100 100 C

Plot the graph showing the ABC profile.

C
Percentage of value

Percentage of items

1
 Inventory Management
Homework: ABC analysis
August 2017
2. Case study: Harry Jones, Inventory control manager (70 points).

Harry Jones was very proud of his new position as inventory control manager for the Wilson Widget Company. His
primary responsibility had been clearly defined: Maintain an inventory level in the warehouse that ensures that
production will not run out of stock, yet also maintain an inventory level that will minimize inventory holding and control
costs. Since Harry had recently had a course in materials management, he knew an approach that should help him. He
decided to make a list of inventory items in one small section of the warehouse to see if he could develop a good plan for
inventory control. If it worked in the one small section, he could expand it to the rest of the more than 30,000 part numbers
in the warehouse.

The following is the data Harry compiled:

Part number Part unit value ($) Quantity currently Average annual
in inventory usage
1234 $2.50 300 900
1235 $0.20 550 2500
1236 $15.00 400 250
1237 $0.75 50 2800
1238 $7.60 180 1400
1239 $4.40 20 4500
1240 $1.80 200 700
1241 $0.05 25 2500
1242 $17.20 2600 5300
1243 $9.00 160 5400
1244 $3.20 430 9500
1245 $0.30 500 3500
1246 $1.10 25 2500
1247 $8.10 60 700
1248 $5.00 390 2000
1249 $0.90 830 2000
1250 $6.00 700 1300
1251 $2.20 80 1400
1252 $1.20 480 1300
1253 $5.90 230 250

When Harry scanned the list, he noticed several things that disturbed him, and he asked one of the experienced inventory
clerks. The following list summarizes the part number issues that concern Harry, and the explanation from the clerk:

Part number 1236, a very expensive part with almost half-a-years worth of inventory. This part is used for a
product that has very cyclical demand, and the busy time of the year is about to start.

Part number 1241 is very inexpensive, yet the inventory is very small. This part has a supplier with an erratic
delivery history, and the part also has a long delivery lead time. A lot of 150 has been on order for some time,
and is now several days past due.

2
 Inventory Management
Homework: ABC analysis
August 2017
Part number 1242, like1236, is expensive with almost half-a-years worth of inventory this part is shipped to a
location on the other side of the country and is being accumulated into a large lot to save shipping costs.

Part 1246 is not too expensive, with a low inventory. This part is produced in-house, and has a specification
tolerance that the older equipment, which was used to produce it, had a difficult time meeting. The last batch
was rejected by the quality department.

Part number 1253 is moderately expensive with a large inventory compared to usage. This part was subject to a
recent quality audit, and almost 150 of the items were rejected as a result of that audit.

Once Harry understood some of the issues, suddenly he did not feel quite as confident that he had the best approach in mind
to control the inventory to meet the expectations of his boss.

Requirements:

a) Use the information above to perform an ABC analysis and evaluate the current situation.

b) Given your evaluation try to develop an integrated inventory control policy that Harry should consider.

c) Is there other information that you would like to see that might help you to make a more effective policy? If so, what
would that information be and how would you use it to help you?

Annual Cumulative Cumulative % Cumulative

Part
usage $ usage of $ usage % of items Class
Number
($) ($) (%) (%)
1242 $91,160.00 $91,160.00 37.09 5 A
1243 $48,600.00 $139,760.00 56.87 10 A
1244 $30,400.00 $170,160.00 69.24 15 A
1239 $19,800.00 $189,960.00 77.29 20 A
1238 $10,640.00 $200,600.00 81.62 25 B
1248 $10,000.00 $210,600.00 85.69 30 B
1250 $7,800.00 $218,400.00 88.86 35 B
1247 $5,670.00 $224,070.00 91.17 40 B
1236 $3,750.00 $227,820.00 92.70 45 B
1251 $3,080.00 $230,900.00 93.95 50 B
1246 $2,750.00 $233,650.00 95.07 55 C
1234 $2,250.00 $235,900.00 95.98 60 C
1237 $2,100.00 $238,000.00 96.84 65 C
1249 $1,800.00 $239,800.00 97.57 70 C
1252 $1,560.00 $241,360.00 98.21 75 C
1253 $1,475.00 $242,835.00 98.81 80 C
1240 $1,260.00 $244,095.00 99.32 85 C
1245 $1,050.00 $245,145.00 99.75 90 C
1235 $500.00 $245,645.00 99.95 95 C
1241 $125.00 $245,770.00 100.00 100 C

3
 Inventory Management
Homework: ABC analysis
August 2017
Plot the graph showing the ABC profile.

C
Percentage of value

Percentage of items

Please write your policy recommendations in the box below:

The company should be aware the issues that concern Harry, since these problems could represent the loss of some sales
and even the loss of the client's confidence.

According to what Harry found, the parts 1236, 1241, 1242, 1246 and 1253, could be classified as A items due to the high
priority that these ones acquired because of their situations, but the most of them should have another classification based
on the ABC analysis realized.

Policies

In order to deliver the orders to clients on time, part numbers that have cyclical demand should always have
available stock, this will take more importance in the busy time of the year.

Parts with a long delivery lead time should have a vast inventory, in order to avoid late deliveries. (Avoid suppliers
with erratic delivery story in this kind of processes.)

Parts produced in house, should have a low inventory since these parts can be obtained faster than others, having
this as result the reduce of costs. The equipment used to obtain these parts should be in good conditions and it
should be actualized constantly in order to comply the quality standards.

Balance the inventory of parts with its usage, if the parts stay too much as part of the inventory, these ones could
be damaged so they will be rejected by audits, having this as consequence a late delivery.

4
 Inventory Management
Homework: ABC analysis
August 2017
c. Is there other information that you would like to see that might help you to make a more effective policy? If so, what
would that information be and how would you use it to help you?

From my point of view, it might be helpful the use of quality terms to make a more effective policy. In this case great part
of the deliveries were delayed because the parts were rejected in audits, so this could be avoided if the company had a
better control, assurance and management of quality.

Indicate here any bibliographical source used for solving the case.

References
Gutierrez Pulido , H., & de la Vara Salazar, R. (s.f.). Control Estadstico de Calidad y Seis Sigma. McGraw-
Hill.
Muller, M. (2011). Essentials of inventory management. United States of America: American Mangement
Association.