The document describes the ABC inventory matrix, which is a tool used to analyze inventory levels. It involves performing two ABC analyses - one based on annual dollar usage and another on current inventory value. Items are classified as A, B, or C in both analyses. The analyses are then combined into a matrix, where items in the diagonal are properly classified/stocked in both. Items above/below the diagonal suggest over/understocking, and the matrix can identify obsolete inventory levels. When used with inventory turnovers, the ABC matrix provides insights to effectively manage inventory investment.
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The ABC Inventory Matrix
The document describes the ABC inventory matrix, which is a tool used to analyze inventory levels. It involves performing two ABC analyses - one based on annual dollar usage and another on current inventory value. Items are classified as A, B, or C in both analyses. The analyses are then combined into a matrix, where items in the diagonal are properly classified/stocked in both. Items above/below the diagonal suggest over/understocking, and the matrix can identify obsolete inventory levels. When used with inventory turnovers, the ABC matrix provides insights to effectively manage inventory investment.
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The ABC Inventory Matrix
The ABC inventory analysis can be expanded to assist in identifying
obsolete stocks and to analyze whether a company is stocking the correct inventory by comparing two ABC analysis. First, an ABC analysis is completed based on annual inventory dollar usage (as shown in Example 7.1) to classify inventories into A, B and C groups. Next, a second ABC analysis is performed based on current or on-hand inventory dollar value (as shown in Example 7.2) to classify inventories again into A, B and C groups. Finally, the two ABC analyses are combined to form an ABC inventory matrix as shown in Figure 7.1. The A items based on current inventory value should match the A items based on annual inventory dollar usage, falling within the unshaded diagonal region of the figure. Similarly, the B and C items should match when comparing the two ABC analyses. Otherwise, the company is stocking the wrong items. The ABC inventory matrix also suggests that some overlaps are expected between two borderline classifications (as indicated by the wide diagonal region). For instance, some marginal B items based on annual inventory dollar usage might appear as C items based on the current inventory value classification and vice versa. Referring to Figure 7.1, plots in the upper-left shaded triangle og the ABC inventory matrix indicate that some A items based on annual inventory dollar usage are showing up as B or C items based on the current inventory value classification and that some B items have similarly been classified as C items. This suggests that the company has current inventories for its A and B items that are too low, and is risking stockouts of their higher dollar usage items. Conversely, plots in the lower-right shaded triangle show that some C items based on annual inventory dollar usage are showing up as A and B items based on current inventory value, and some B items are similarly showing up as A items; thus indicating that the company has current inventories for its B and C items that are too high, and is incurring excess inventory carrying costs. This may also point to the presence of excessive obsolete stock if the inventory turnover ratios are very low. Obsolete stocks should be disposed of so that valuable inventory investment and warehouse space can be used for productive inventory. When used in conjunction with inventory turnovers, the ABC inventory matrix is a powerful tool for managing inventory investment. Example 7.2 shows the classifications based on current inventory value for the same ten items shown in Example 7.1, and it also shows the annual dollar usage classifications. The two ABC analyses from Examples 7.1 and 7.2 are combined and plotted on the ABC inventory matrix shown in Figure 7.2. Each inventory item is plotted on the matrix using the “percent of total current inventory” on the horizontal axis and the “percent of total annual dollar usage” on the vertical axis. For instance, the coordinate of the item “T519” would be (40.5, 0.4). The vertical axis ranges from 0.4 percent to 35.2 percent, and the horizontal aixs ranges from 0.2 percent to 40.5 percent, thus “T519” falls on the extreme lower- right corner of the matrix. The plots in Figure 7.2 show that six of the inventory items fell along the diagonal, suggesting the appropriate stocking levels. The company has probably overstocked items “T519” and “L227” and understocked “N376” and possibly “R116”. It is important however, that the inventory turnover ratios for each item be used in conjunction with the ABC inventory matrix to get a sense of how fast or slow inventories are turning over.