ABC/ABCD AnalysisABC/ABCD Analysis

ABC analysis is based on ParetoABC analysis is based on Pareto´́s Law, which s Law, which separates the “trivial many” from the “vital separates the “trivial many” from the “vital few”. few”. In inventory terms, this suggests that a In inventory terms, this suggests that a relatively small number of inventories items relatively small number of inventories items account for considerable importanceaccount for considerable importance within a within a firmfirm´́s inventories.s inventories.

ParetoPareto´́s Law (80/20 Rule)s Law (80/20 Rule)

Pareto's Law is about concentrating on what's important.

Stated simply: the significant items in any group normally account for a relatively small proportion of the total. For example, 80 % of your sales probably come from 20 % of your customers. So concentrating most energy on this 20 % will bring you the best results.

Decision Steps for ABC ClassificationDecision Steps for ABC Classification

Select some criterion,Select some criterion, such as sales revenue, such as sales revenue, materialmaterial´́s consumption, etc., for developing s consumption, etc., for developing the ranking.the ranking.

Rank items in descending orderRank items in descending order of importance of importance according to this criterion and to calculate according to this criterion and to calculate actual and cumulative total sales revenue actual and cumulative total sales revenue (consumption) percentages for each item.(consumption) percentages for each item.

Group the itemsGroup the items into ABC(D) categories.into ABC(D) categories.

ABCD CategoriesABCD CategoriesAA a small part of the assortment items constituting the a small part of the assortment items constituting the

main share (ca. 80 %) of the total sales/ main share (ca. 80 %) of the total sales/ consumption.consumption.

BB a slightly larger part of the assortment constituting a a slightly larger part of the assortment constituting a medium share (ca. 15 %) of the total sales/ medium share (ca. 15 %) of the total sales/ consumption.consumption.

CC a large part of the assortment items constituting a large part of the assortment items constituting a small share (ca. 5 %) of the total sales/ a small share (ca. 5 %) of the total sales/ consumption.consumption.

DD items, which may be “dead” items, which may be “dead” -- items which the items which the company should eliminate from its inventory.company should eliminate from its inventory.

ABC AnalysisABC Analysis

20

80

100

10095

6040 80

60

20

40

Percentage of Items

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Case: ABC Analysis for Big Case: ABC Analysis for Big Orange Product, Inc.Orange Product, Inc.

Item Annual Sales Percent of Cumulative % Classif. Code (US$) Annual Sales Sales Items Category

64R 5 000 50,0 50,0 10,0 A 89Q 3 000 30,0 80,0 20,0 A 68J 400 4,0 84,0 30,0 B 37S 340 3,4 87,4 40,0 B 12G 300 3,0 90,4 50,0 B 35B 240 2,4 92,8 60,0 B 61P 220 2,2 95,0 70,0 B 94L 200 2,0 97,0 80,0 C 11T 160 1,6 98,6 90,0 C 20G 140 1,4 100,0 100,0 C TOTAL 10 000 100,0 - -

Lean Production ConceptLean Production Concept

The “lean production” concept was born about The “lean production” concept was born about 30 years ago, as the foundation stone of the 30 years ago, as the foundation stone of the “Toyota Production System”, whose father “Toyota Production System”, whose father was Toyotawas Toyota´́s head designer Taichii Ohno.s head designer Taichii Ohno.

He identified seven sources of waste:He identified seven sources of waste:

Seven Sources of WasteSeven Sources of Waste

overproduction,overproduction, waiting,waiting, transport,transport, unsuitable processes,unsuitable processes, generation of unnecessary stock,generation of unnecessary stock, useless movement,useless movement, defects.defects.

Principles of Lean Production Concept I.Principles of Lean Production Concept I.

systemsystem--based thinking including assessment based thinking including assessment with regard to total costs, and transparency of with regard to total costs, and transparency of processes,processes,

reduction of complexity,reduction of complexity, design of products respecting the design of products respecting the

manufacturing and logistical aspects,manufacturing and logistical aspects, integration of suppliers and customers into integration of suppliers and customers into

process chains and logistical management of process chains and logistical management of entire chains, i.e. from the suppliers to the entire chains, i.e. from the suppliers to the endend--customer,customer,

reduction of the number of suppliers,reduction of the number of suppliers, reduction of the volume of internal work, and reduction of the volume of internal work, and

orientation to outsourcing,orientation to outsourcing, focusing on the key competencies,focusing on the key competencies, implementation of JIT and/or KANBAN,implementation of JIT and/or KANBAN, elimination of wastage,elimination of wastage, continuous improvement (Kaizen),continuous improvement (Kaizen), delegation of responsibilities to the delegation of responsibilities to the

employees,employees, orientation to team cooperation.orientation to team cooperation.

Principles of Lean Production Concept II.Principles of Lean Production Concept II.