Abc Analysis

1. Should safety stock be larger for A items?

Answer:

The safety stock for item A should be larger.

In ABC analysis, item A is consider containing only 20% of the total inventory but it contains total 80% of the annual dollar volume. Which means 80% of my investment in the inventories is concentrated towards item A. Therefore, managers put tighter control and monitor the level of inventory items they have in item A. If managers cannot satisfy, the unusual demand for item A they will lose profit potentials and thus ending up with poor business return. Therefore, these items are reviewed frequently thus; managers maintain a lower lot size and larger safety stock to maintain the unusual demands.

2. Should safety stock be larger for C items?

Answer:

The safety stock for item C should be larger.

In ABC analysis, item C is consider containing 50% of the total inventory but it contains only 5% of the annual dollar volume. Even though item C has the least annual dollar, volume but they contain 50% of the total inventory. It is cost effective (holding cost is low) company can maintain higher level of inventory and safety stock.

3. Should EOQ/ROP be calculated for C items?

Answer:

Yes. EOQ/ROP should be calculated for C items.

Even if the C items hold only 5% of the annual dollar value, there are costs of planning, controlling and monitoring the C lass items.. But if the C class items are not managed properly, they will eventually lead to increases in cost which could have easily been avoided, had the company managed the C class items properly. The main goal of a business is to maximize profit and they can only achieve that goal by making sure all activities are carried out by incurring the minimum cost and that includes the management of C class items.

4. How does J-I-T fit in with ABC classification?

Answer:

Just-in-time (JIT) is a philosophy that supports having the lowest possible inventory. Companies that use JIT, want to avoid the costs incurred in managing inventory. Therefore since the item A,B and C hold the highest to lowest cost (in that order) JIT could help a company to prioritize and reduce the inventory costs of the items holding the greatest amount of cost.

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