Reference no: EM131871608

Assignment

Compare and contrast the materials on ABC in no more than 2 pages

Discussion

Describe ABC Inventory Classification

Danny,

ABC inventory analysis is a way that a company can group items by dollar volume. Axsa¨ter, (2015), states that 20% of the items account for about 80% of the dollar value. Typically, companies categorized their items into three classes, A= high dollar volume, B= intermediate dollar value items, which account for about 30% and C= low dollar volume items.

This type of inventory control is used throughout materials and distribution management; which is also referred to as selective inventory control. Fritch (2015), describes this type of inventory control as the 80/20 rule, also known as the Pareto Analysis.

The biggest issue as stated by Bowersox, Closs, Cooper and Bowersox (2013), is that using the Activity-base costing approach is identifying the activities, related expenses and drivers of expense. The authors continue to suggest that costs should be first traced to the activities performed and then activities should be related to specific product or customer segments of the business."

I think the challenge here is identifying which items fall into category A or B, which would be driven by sales spikes or even new trending items on the market. I like the approach, but it seems if sales were sporadic inventory mangers would have to reclassify items and routinely analyze the classification status.

Axsa¨ter, S. (2015). Inventory Control. Cham, Switzerland: Springer.

Bowersox, D. J., Closs, D. J., Cooper, M. B. and Bowersox, J. C. (2013). Supply Chain Logistics Management. New York, New York: McGraw-Hill Companies, Inc.

Fritsch, D. (2015, July 10). What is ABC Analysis for Inventory Optimization?

Franciso,

The ABC Inventory Classification technique assigns inventory items to one of three groups according to relative impact or value of the objects that make up the group.

ABC classification is based on the Pareto principle commonly known as the 80/20 rule. In inventory management, it is used to classify stock based on profits, inventory costs, or service levels. Items in class A, B, and C are prioritized from highest to lowest with "A" items being the highest and "C" the lowest ranking.

Sanders, (2014), states that "A" items are those which are high demand items, and therefore require frequent analysis. They account for 70-80 percent of inventory value while accounting for only 10-20 percent of the inventory.

"B" items are intermediate valued products which account for 30 percent of the inventory and contribute to approximately 35 percent of the value. "C" class items are the remaining 50 percent of stocked inventory. However, they only contribute to 10 percent of total inventory value.

The criteria used to assess an item will determine the group to which it is assigned. Coyle, (2013), states that using revenue per item as the criterion might assign "Item 1" to the A group while using the profit per item as the criterion might assign "Item 1" to the C group.

Determining which criteria to use for inventory classification will depend on the goals the organization is trying to achieve. Also, remember that an organization might determine that it requires more or less than three categories.

References:

Axsater, S. (2015). Inventory Control (3rd ed.). Switzerland: Springer International Publishing.

Coyle, J., Langley, C., Novack, R. and Gibson, B. (2013). Supply Chain Management. Boston, Massachusetts: Cengage Learning.

Sanders, Nada; Council, of Supply Chain Management Professionals. (2014). How Products and Services Are Produced. Upper Saddle, NJ: Pearson Education Inc.