Operations Management

OPERATIONS MANAGEMENT

WEEK-7: OPERATIONS PLANNING-1

WEEK-7: SALES AND OPERATION PLANNING

What is sales and operating planning?

As a component of a company's master planning, sales and operations planning

(S&OP) is an integrated planning process that synchronizes financial, supply, and
demand planning. The purpose of S&OP is to facilitate executive decision-making
concerning the approval of a workable and lucrative material and financial plan.

Both tactical and strategic planning includes the sales and operations plan.
Strategically, knowledge on potential shifts in demand for specific product lines or
in particular geographical areas can influence choices about how to enhance or
decrease manufacturing capacity, whether to hire more people or not, and how to
handle suppliers over the long run. S&OP, on the other hand, tactically produces a
production plan that is authorized by upper management and utilized to develop a
master schedule and a material requirements plan (MRP).

The sales and operations plan uses global, aggregate demand1 as a starting point
and compares that expected demand to available supply in terms of resources—
such as machines and manpower—and material capacity. The level of analysis and
the trade-offs presented allow the executive team to understand the decision

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criteria and come to a consensus decision on a plan the company should move
forward with.

Key components:

Demand Planning: To forecast sales, the sales staff looks at past performance,
marketing strategies, and industry trends.

Supply Planning: Production schedules, material requirements, and inventory

management techniques are all outlined in the supply plan that operations develops
using the sales forecast.

Integrated Planning: To find any holes or discrepancies, all departments evaluate

the sales and operations plans together. Together, they create a cohesive S&OP
plan that takes into account every facet of the company.

Benefits:

Enhanced Efficiency: S&OP helps prevent inefficiencies like overproduction and

stockouts by coordinating sales and operations.

Improved Customer Satisfaction: S&OP helps to improve customer service by

guaranteeing product availability and on-time delivery.

Lower Costs: The organization as a whole saves money when resources are
allocated effectively and risks are kept to a minimum.

Enhanced Profitability: Higher earnings are a result of better planning and

decision-making based on precise forecasts.

Better Business Strategy: S&OP promotes a cohesive strategy that synchronizes

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daily operations with the organization's long-term objectives.

Steps:

1. Gather and manage data (forecasting)

For the specified time frame, each team gathers the following data:

• Historical Sales Trend Research

• Success rates of plans

• Precision

• The demand planner uses this data to create forecasts. Finance,

operations/supply, sales, marketing, and logistics are the main areas
involved. If your business does not already have software that gathers this
data automatically, you might want to think about purchasing a CRM.

2. Demand planning

Accounting will make modifications and create a demand plan once the forecasts
for variability have been verified. The scheme consists of:

• Policies for customer service

• Advancements

• singular occurrences

• fresh releases

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The demand planner is in charge of this process, but before the S&OP meeting,
sales and marketing should offer feedback on the finalized plan.

3. Production and supply planning

The head of supply collaborates with operations to develop a supply strategy using
the demand plan. This comprises:

• inventory goals

• Safety supply

• Production techniques

• Potential Liabilities in Capacity Scheduling Inventory

• The presentation should also include any logistical adjustments that are
required prior to launch.

4. Pre-Sales &Operations meeting (plan reconciliation)

The plans for supply and demand are compared, and adjustments are made
according to how practically they can accommodate one another. This step requires
the finance department to be very important because all plans have to stay within a
certain budget. This is the moment to determine whether the company has the
money to proceed with this strategy or whether some parts need to wait until the
following fiscal year if a materially expensive hurdle is discovered.

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5. Executive Sales &Operations meeting

The plans are presented in the executive S&OP meeting once everything is
finalized. An agreeable, workable plan for the entire firm should be in place by the
end of the conference.

6. Implementation

To implement the plan's necessary modifications, each department head

collaborates both within and across functional boundaries with their team. It is
advised that the implementation be regularly assessed.

LOT SIZES:

The amount of a product that is ordered or manufactured at one time in the retail
industry is referred to as the lot size. It calculates how many things are bought,
kept, and sold in a given amount of time. Choosing the right lot size is essential to
keeping the expenses of keeping inventory and consumer demand in harmony.
Retailers carefully examine variables including demand variability, storage
capacity, and lead times from suppliers when figuring out the right lot size for each
product.

LOT SIZE AFFECTS:

Product availability is greatly influenced by lot sizing, which affects the ratio of
avoiding surplus inventory to having enough stock to meet consumer demand.

Setup Expenses:

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Greater Lot Sizes: These often result in less setup expenses for each product unit.
This is so that the setup costs are dispersed over a higher volume of manufactured
goods. Consider constructing a machine to generate 100 instead of 1000 widgets.
The setup cost is comparatively constant, however the cost per widget decreases
with increased quantity.

Smaller Lot Sizes: Because the fixed setup cost is divided among fewer goods,
these have higher setup costs per unit. With smaller lots, more setups will be
required to keep up with demand.

Ordering Fees:

Greater Sizes of Lots: These frequently lead to increased ordering expenses per
unit. The cost of placing each order is divided among fewer goods when orders are
placed more frequently for smaller quantities.

Minimum Capacity Needed:

Greater Lot Sizes: These may temporarily strain the ability to produce. It
necessitates a specialized production run because you're creating a higher quantity
all at once, which could tie up resources and reduce flexibility for other production
needs.

Smaller Lot Sizes: These often call for a lower capacity of manufacturing at any
given moment. More frequent and smaller production runs provide greater
flexibility to adapt to changes in the demand for other products and better overall
capacity utilization.

Static:

Inventory management strategies that rely on pre-established characteristics and

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ignore dynamic shifts in lead times or demand are known as static approaches.
These strategies are used to determine the ideal lot size. They might not always be
the most accurate answer, but they do provide a straightforward method. Here are
two typical static techniques:

A straightforward and simple method known as Fixed Order Quantity (FOQ)

establishes a fixed quantity to be ordered each time inventory hits a predefined
reorder point (ROP).

Lot-for-Lot (L4L):

By placing an order for the precise quantity required to meet the demand for the
upcoming period (e.g., daily, weekly, or monthly), this strategy streamlines
inventory management.

Economic Order Quantity (EOQ):

This is a popular technique that calculates the ideal lot size to reduce overall
inventory expenses by taking holding and ordering costs into account.

It may not always be reasonable to assume constant lead times, demand, and unit
costs.

Periodic:

Inventory management techniques called periodic lot-sizing procedures are used to

calculate the ideal order quantity at predetermined intervals, usually in days,
weeks, or months. Periodic processes combine demand over a predetermined
period of time and order a single lot to satisfy that demand, in contrast to static
techniques that order based on a reorder point.

A version of the Economic Order Quantity (EOQ) model used in a periodic

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framework is called Period Order Quantity (POQ). The ideal lot size is determined
by taking into account demand, holding expenses, and startup costs for the full
duration.

Fixed Period Order Quantity: Regardless of the actual demand during that period,
this strategy establishes a pre-determined lot size to be ordered at the beginning of
each period. Although it's easier to use, it might not be as efficient as POQ, which
considers actual demand.

Dynamic:

Compared to static and periodic methods, dynamic lot-sizing procedures are

inventory management techniques that adopt a more flexible approach. To
ascertain the ideal order quantity, they take into account real-time data as well as
dynamic variables like lead times and variations in demand.

Least Unit Cost (LUC)

The average cost per unit of demand across several ordering scenarios is
determined using the LUC technique. It takes into account setup and inventory
holding expenses for different order volumes. The order quantity that minimizes
the LUC value is the one that is selected.

Least Unit Cost (LUC)

The ordering strategy that minimizes the overall cost of ordering and inventory
holding throughout a planning period is the main goal of the LTC technique.
Instead of computing a unit cost directly, it takes into account the whole cost
across the entire plan.

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Part Period Balancing (PPB)

A variant of the LTC approach known as PPB is designed to deal with

circumstances with uneven demand periods over the course of a planning horizon.
Its goal is to equalize the holding costs of varying order volumes throughout
uneven demand intervals.

Silver-Meal (SM) Heuristic:

When compared to intricate techniques like Wagner-Whitin, the Silver-Meal

heuristic is a more straightforward and computationally efficient strategy. It takes
into account things like quantity discounts for larger orders and the price of
backordering due to stockouts.

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EOQ II

Inventory holding costs;

The costs a company pays to store unsold inventory are known as inventory
holding costs, or carrying costs. It's basically the amount of money you pay to store
goods that buyers haven't yet paid for.

One important component of supply chain management is minimizing the cost of

retaining inventories. To keep the right quantity of stock on hand and save holding
costs, businesses might use tactics like implementing precise reorder points and
demand forecasting tools.

Operating costs:

Ordering costs are the costs a business incurs each time it places an order for
inventory or raw materials. They are sometimes referred to as procurement costs or
establishment costs. These are basically the expenses that come with the
administrative work and planning that go into buying new inventory, apart from
the actual cost of the goods.

An important consideration in determining the economic order quantity (EOQ) is

ordering cost in addition to inventory holding cost (cost of retaining inventory).

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The optimal order quantity that reduces the overall cost of inventory management
is known as the EOQ.

Setup costs:

In inventory management, ordering cost is sometimes referred to as setup cost.

The costs incurred each time a business places an order for inventory or raw materi
als are what they both allude to.

Operations inventories:

The several kinds of stock that a company has on hand to help with daily
operations are known as operational inventories. They stand for the work-in-
progress (WIP), finished goods, and raw materials needed to fulfill orders from
customers and maintain a smooth production process.

The several kinds of stock that a company has on hand to help with daily
operations are known as operational inventories. They stand for the work-in-
progress (WIP), finished goods, and raw materials needed to fulfill orders from
customers and maintain a smooth production process.

Assumptions:

A mathematical model called the economic order quantity (EOQ) is used in

inventory management to calculate the optimal order quantity that will reduce the
overall costs of inventory for a given item. It basically assists companies in
locating the optimal balance between placing excessively large orders (high
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ordering costs) and keeping an excessive amount of inventory (high holding costs).

Constant Demand: The EOQ model makes the assumption that there will always
be a steady and predictable demand for the product. This is oversimplifying the
situation, as actual demand may vary.

consistent Lead Time: It is expected that the lead time, or the period of time
between placing an order and getting the inventory, is predetermined and
consistent.

Constant expenses: It is assumed that the expenses associated with ordering and
holding each item or each arrange. In actuality, these expenses could change based
on supplier negotiations or the size of the order.

Single Item: One inventory item is usually the center of the EOQ model.

Lack of Stockouts: The model makes the assumption that there are no shortages
of inventory.

Instantaneous replenishment: Upon placing an order, the full order quantity is

supplied right away.

Calculation of EOQ:

The EOQ formula is: EOQ = √(2DS/H)

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Where,

D- demanding costs ( on an annual basis)

S- order costs (per purchase order)

H- holding costs (per unit, per year)

Sample problem-1:

consider a retail clothing shop that carries a line of men’s shirts. The shop sells
1,000 shirts each year. It costs the company 6000 per year to hold a single shirt in
inventory, and the fixed cost to place an order is 2000.

The EOQ formula is the square root of (2 x 1,000 shirts x 2000 order cost) / (6000
holding cost), The ideal order size to minimize costs and meet customer demand is
slightly more than 66 shirts.

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Inventory management-1

What is inventory:

Everything that a company has on hand that is either used to produce goods or is o
n the market is referred to as inventory.This comprises partially finished commodit
ies, work-in-progress, and
raw materials.On a company's balance sheet, inventory is regarded as a current ass
et since the completed goods are anticipated to be sold within a year.

What is inventory management?

The art of managing an organization's whole inventory of products is known as

inventory management.

Thisencompasses
the following procedures and covers everything from raw materials to completed g
oods:

• Purchasing and obtaining stock Keeping and

• arranging inventory Monitoring and

• utilizing stock Getting rid of stock

• selling inventory

Key aspects:

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Maintaining precise records of the amount, location, and movement of inventory is

known as inventory tracking.
Demand forecasting: Companies must estimate the quantity of each product they
will sell in a specific time frame. They can use this to calculate how much
inventory to order.
Ordering strategies: There are several ways to figure out how much and when to
order inventory. These can assist companies in cutting expenses and optimizing
their inventory levels.
Inventory must be stored and arranged effectively in warehouses so that it can be
quickly located and retrieved when needed. Software for inventory management
can be a useful resource for companies of all kinds. Numerous inventory
management chores, such monitoring inventory levels and producing reports, can
be automated by this program.

Need for inventory management:

Saves money: Cash flow is impeded by inventory. Having too much stock on hand
is equivalent to having a lot of money sitting around that could be put to better use.
Businesses may prevent this by using inventory management to maintain optimal
quantities of inventory.

Prevents stockouts: Low stock might result in lost revenue and disgruntled
clients. Businesses may make sure they have adequate inventory on hand to meet
client demand by using inventory management.

lowers storage costs: It is expensive to store merchandise. Businesses can lower

their storage requirements and save money on rent, utilities, and other warehouse
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costs by maintaining lean inventory levels.

Boosts productivity: Ineffective inventory control might result in time and effort
loss. Employees might, for instance, spend a lot of time looking for things that are
missing or out of stock. Efficient inventory control systems can increase
productivity by streamlining procedures.

Preserves product quality: Certain inventory categories, such as food and

medication, may have expiration dates. Businesses may track these things and
make sure they are sold before they spoil by using inventory management.

Enhances sales forecasting: Businesses can learn more about client demand and
purchasing habits by examining inventory data. Using this data can help you
anticipate sales more accurately and choose wisely when it comes to buying goods
in the future.

Boosts client satisfaction: Repeat business comes from satisfied customers. By

making certain that the goods customers desire are available, businesss can
improve customer’s satisfaction and loyalty.

Finished goods inventory:

The stock of completed goods that a manufacturer or retail establishment has on

hand and prepared for consumer sale is referred to as finished goods inventory, or
FGI. These are products that have completed every step of manufacture and don't
need any more adjustments in order to be sent.

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Need for finished goods inventory management;

Reduce waste and spoilage: Proper inventory management helps keep food from
spoiling because it has a limited shelf life. Businesses are able to order only what
they need and sell things before they expire by keeping track of inventory levels
and expiration dates. This saves money and cuts down on waste.

Make sure the food is fresh and of good quality. Consumers want food that is both.
Businesses may maintain ideal stock levels by using effective inventory
management, which keeps products off the shelves for extended periods of time
and avoids compromise.

Boost business margins since spoiled food costs money. Businesses can increase
their profit margins by reducing waste.

React to variations in demand: The demand for food items might change in
response to the seasons, special occasions, and even the weather. Businesses can
predict these variations and modify their stock levels by using inventory
management. This lessens the likelihood of stockouts during times of high demand
and stops overstocking during times of low demand.

Ordering efficiency: Companies can streamline their ordering procedures by

using accurate inventory data. By figuring out the reorder thresholds for various

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products, businesses can make sure they have an adequate supply without going
overboard or investing money in unneeded inventory.

Types of inventory:

Raw materials:

The basic ingredients that a business utilizes to manufacture its finished goods are
known as raw materials and components. For instance, the raw materials inventory
of a furniture producer would include wood, nails, and glue.

Work in progress:

Items that are still in the production process but are not yet final goods are referred
to as work in progress, or WIP. For instance, cars that are only partially
constructed off the assembly line would be included in a manufacturer's work-in-
progress (WIP) inventory.

Finished goods:

Finished goods are products that are prepared for sale to consumers. A finished
goods inventory, for instance, would comprise every shirt, pair of pants, and other
item that is displayed on the shelves for purchase in a clothes store.

Pipeline inventory:

The value of finished items that are currently in route after being ordered from a
manufacturer or supplier is known as pipeline inventory. It is sometimes referred to

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as expected on-order inventory or transit stock.

Independent demand:

In inventory management, the term "independent demand" describes the desire for
a finished good that is unaffected by the demand for other goods.

Here's an example to show the distinction: Consider a business that produces

finished bicycles. Bicycles are in independent demand. It is affected by things like
new product releases, petrol pricing, and fitness trends. Conversely, there is a clear
correlation between the demand for bicycles and the demand for the tires that are
used on them (dependent demand item). More tires are required when more
bicycles are sold.

Predicting: Forecasting independent demand can be more difficult because it is

impacted by other variables. Forecasting techniques are commonly employed by
businesses to consider past sales information, market patterns, and economic
indicators.

Dependent demand:

In inventory management, the term "dependent demand" describes product demand

that is directly correlated with the demand for other products. These products are
usually subassemblies, components, or raw materials that go into making a final
product.

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Connected to the parent items: Demand for a higher-level item, sometimes

referred to as the "parent item" or "finished good," drives demand for dependent
demand items. For instance, since each bookshelf requires a specific quantity of
screws to construct, the demand for screws (dependent) is closely correlated with
the demand for bookshelves (parent).

Calculated demand: Dependent item demand is not directly predicted. Rather, it

is computed using the parent item's production schedule or bill of materials
(BOM).

The precise amounts of each component required to make one unit of the
completed good are listed in the BOM.

Factors affecting inventory operations:

Financial demand:

Cost of capital: Keeping inventory demands financial outlay. When purchasing

inventory, businesses must take the cost of borrowing money into account.
Increased borrowing costs encourage companies to maintain lower stock levels.
Storage expenses: Maintaining merchandise and warehousing it can be expensive.
Companies must strike the correct mix between lowering storage costs and keeping
an adequate supply of inventory on hand.

Ordering expenses: There are expenses related to placing orders, including

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shipping and processing charges. Companies must balance these expenses against
the possibility of stockouts.

Market demand:

Demand forecasting: Precisely estimating client demand is essential to the best

possible inventory control. Businesses run the danger of stock outs if they
underestimate demand. Carrying expenses and surplus inventory might result from
overestimating demand.

Seasonality: Demand for some products varies throughout the year. Companies
must modify their inventory levels to accommodate demand during the busiest
times of the year without being burdened by surplus inventory during downturns.

Life cycle of a product: Throughout their life cycle, products go through several
stages (introduction, growth, maturity, decline). Strategies for inventory
management should change according to these phases. For instance, in order to
accommodate possible spikes in demand, a new product that is just entering the
market may need larger stock levels.

Suppliers:

Lead times: One important consideration is how long it takes to get inventory
from a supplier. Increased safety stock levels are necessary to prevent stockouts

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during longer lead periods. Companies might also try to reduce lead times by
collaborating with nearby suppliers, for example.

Dependability of the supplier: Businesses are able to keep lower safety stock
levels when they have a supplier they can trust and who delivers on time every
time. Higher stock buffers may be necessary for unreliable suppliers in order to
reduce the chance of stockouts.

Minimum order quantities: Businesses are required to purchase minimum order

quantities (MOQs) from certain suppliers. Inventory control may be impacted by
this, particularly for items with lesser demand.

Product demand:
Value: Stricter inventory management are usually necessary to guard against theft
and loss of high-value items.
Individual vs. Bulk: When it comes to inventory management, products sold indiv
idually may not need the same techniques as those sold in bulk.
Inventory management systems: These systems can automate a wide range of inv
entory functions, including demand forecasting, reorder point generation, and stock
level tracking.

Management and technology:

Inventory control procedures: Accurate inventory records are maintained and
stockouts are avoided with the use of efficient procedures including routine
inventory cycle counts and the application of safety stock levels.
Management abilities: Data analysis, well-informed stock level judgments, and

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the implementation of effective inventory management procedures are all

capabilities of skilled inventory managers.

W7- Inventory models-II

What is reorder point?

In an inventory model, the precise inventory level at which a company should
place a fresh order to prevent stockouts is known as the reorder point (ROP). It
functions similarly to a trigger point, alerting you when to replenish an item.

Key concepts of Reorder point:

Preventing Stock outs: ROP's main purpose is to provide as a buffer against

stockouts. You may make sure there is enough inventory left to cover the lead
time—the amount of time it takes to receive a new order—before the current stock
runs out by establishing a reorder point. By doing this, operations are kept running
smoothly and lost revenue from unavailable products is prevented.

Optional Safety Stock: A safety stock level is an optional addition to the ROP

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formula. This excess inventory is kept on hand as a safety net against unforeseen
circumstances like spikes in demand.

Benefits of Reorder point:

Prevents Stockouts: The main advantage of ROP is its ability to avoid stockouts,
which are instances in which a company runs out of a specific item before
receiving a fresh supply. Stockouts can result in lost revenue, irate clients, and
reputational harm to a business. Businesses can make sure they have enough
inventory on hand to meet demand until the next order arrives by establishing a
reorder point that accounts for lead time.

Lowers Inventory Costs: A company's resources may be greatly depleted by

maintaining an excessive amount of inventory. ROP assists companies in avoiding
this by encouraging them to place orders for only what is required. This lowers the
expense of storage, the insurance premiums related to maintaining inventory, and
the possibility of waste from obsolescence (i.e., things that become out of style or
outmoded).

Boosts Productivity: ROP makes inventory management more efficient.

Businesses can free up significant time and resources that can be focused towards
other areas by using inventory management systems to automate reorder point
calculations and even purchase orders.

Boosts Customer Satisfaction: It is important for customers to be satisfied that

products are available when they need them. Businesses may guarantee a more
seamless purchasing experience for their clients by using ROP to prevent
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stockouts.

Provides a Balance: ROP assists companies in striking a balance between

inventory management's two competing objectives:

Keeping an adequate supply of goods to satisfy consumer demand and prevent

stock outs.

Flexibility: Various inventory scenarios can be accommodated using ROP.

Companies can modify the reorder point for particular items according to the
following criteria:
Variations in demand (seasonally higher ROP products)
The item's value (more stringent regulations for expensive products)
Dependability of the supplier (larger ROP for unreliable suppliers)

Qualititative:

The ROP is calculated using the following formula:

ROP = LeadTimeDemand + SafetyStock

Where:

Lead Time Demand is the average demand during the lead time.
Safety Stock is the buffer stock held to account for variability in demand and lead
time.
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Quality discount models:

Sellers can use a quantity discount model as a pricing tactic to encourage buyers to
purchase products in larger quantities.

Tiered Pricing: As previously indicated, this is the most prevalent kind. With
every increased quantity tier, it provides a fixed price reduction.

Cumulative Quantity Discounts: In this model, the discount is not based on the
quantity of a single order, but rather on the total quantity purchased over a
predetermined period of time. This promotes client loyalty and repeat business.

Key terms:

Discount Schedules: The discount schedule in a quantity discount model lists the
precise price breaks available for certain purchase amounts. Usually, it takes the
shape of a pricing hierarchy.

Trade-off: There is a trade-off between the possible advantages and disadvantages

for suppliers and purchasers when thinking about bulk discounts.

Buyer benefits include a lower unit pricing and maybe lower ordering costs.
Cons for purchasers: Higher initial cost, more storage requirements, and
obsolescence risk.
Seller advantages include higher sales volume, lower order processing expenses,
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and better inventory turnover.

Seller disadvantages include decreased profit margins per unit sold and trouble
luring clients with modest order amounts.

Total Costs of Inventory: This is the total of all expenses related to maintaining
inventory. Usually, these consist of:

Ordering costs: The price you pay to place an order, including shipping and
handling charges.
Holding costs: The price of keeping inventory, including insurance, warehouse
rent, and possible spoiling (for perishable commodities).

When using quantity discount models, the ideal order quantity (EOQ) is: With
quantity discounts, figuring out the ideal order quantity (EOQ) is much more
important. The order quantity that reduces overall inventory expenses is known as
the EOQ.

ABC Analysis:

ABC analysis, often known as ABC classification, is an essential component of

inventory control. It enables company owners to differentiate the items in their
inventory and concentrate on handling them according to their value. ABC
analysis's primary goal is to maximize returns on minimal expenditure while
avoiding inventory or resource waste.

According to the ABC analysis, no product can be worth the same on the market.
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They fall into three distinct categories:

The most valuable and most necessary products are those found in category A.
About 20% of all products and 80% of your company's sales are generated by
segment A goods. It is regarded as a niche market with few products but high sales.

The value of the products in category B is somewhat higher than that of sector B.
About 15% of commodities are regulated, and 15% of income is generated. Not to
add, there are more products in this area overall, but they are less useful.

Although there are more products in category C, they are less valuable in terms of
making money. In contrast to categories A and B, segment C generates only 5% of
the stock's maximum share of 50%.

Application of ABC analysis:

Improving Inventory Management Practices:

A Items: To reduce the chance of a stockout, impose more stringent controls such
as cycle counting, safety stock buffers, and maybe vendor-managed inventory
(VMI) systems.

B Items: For B items, use forecast-based ordering, reorder point systems, and
routine inventory reviews.

C items: Reduce the frequency of reviews and maybe apply fixed order quantity
models to streamline controls for C goods.
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Strategic Purchasing and Ordering:

A Items: To cut costs and increase efficiency, bargain with suppliers for bulk
discounts, extended payment periods, or just-in-time (JIT) delivery schedules.
B Items: Continue to cultivate positive connections with suppliers and bargain for
competitive prices.
C items: Speak with suppliers about consignment inventory or blanket orders for
C products to expedite ordering procedures and perhaps lower

Management of Warehouses:

A items: For quicker retrieval and more efficient operations, place A goods in
easily accessible areas of the warehouse.
B Items: Set aside specific storage space for B items, taking into account variables
like frequency of use and any obsolescence concerns.

C Items: C items may be kept in the warehouse's bulk storage or less accessible
sections.

Management of Product Assortment:

A Items: Keep an eye on the performance and demand of A items constantly to

spot potential for new product lines or calculated marketing campaigns.
B Items: Evaluate B items on a regular basis to determine their continued worth.
You may also want to consider getting rid of slow-moving items or haggling with
suppliers for lower prices.
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C Items: Determine whether you really need to stock C items on a regular basis.
You may also want to look for less expensive suppliers or get rid of low-demand
items.

Total Cost of Inventory Management:

ABC analysis helps organizations save overall inventory carrying costs related to
handling, storage, and insurance by concentrating control efforts on high-value A
goods.
Another way to save costs is to make low-value C item controls simpler.

Example:

List the products in descending order based on their annual consumption value.

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. Total up the number of units sold and the annual consumption value.

Calculate the cumulative percentage of items sold and cumulative percentage of

the annual consumption values using the totals.

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Determine the thresholds for splitting the data into A, B and C categories. The
threshold for determining the ABC split will be unique to your company and your
product mix, but typically it’s close to 80% / 15% / 5%.

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