How to carry out an ABC analysis of inventory
Filed Under Blog
ABC analysis is a basic supply chain technique, often carried out by inventory controllers/materials managers, and is the starting point in inventory control.
A system of categorization, with similarities to Pareto analysis, the method usually categorizes inventory into three bands with each band having a different management control associated. Although different criteria may be applied to each category the typical method of “scoring” an inventory item is that of annual consumption value of said item (qty consumed X cost of item) with the result then ranked and then scored (A, B or C).
Bandings may be specific to the industry but typically follow a 70%, 90%, 100% banding in that A class items represent 70% of the value, B class items fall between 70% and 90% of the annual value with C class the remaining. In practical terms the complex high cost materials typically fall into the A class items, with the consumable, low cost (and typically fast moving) classed as C class.
Not all stock is equally valuable and therefore doesn’t require the same management focus. The results of the ABC analysis provide information that helps evaluate how each inventory part should be monitored and controlled. These controls are typically:
A class items which are critically important and require close monitoring and tight control – while this may account for large value these will typically comprise a small percentage of the overall inventory count.
B class are of lower criticality requiring standard controls and periodic reviews of usage.
C class require the least controls, are sometimes issues as “free stock” or forward holding.
In summary, ABC Analysis is the basis for material management processes and helps define how stock is managed. It can form the basis of various activity including leading plans on alternative stocking arrangements (consignment stock), reorder calculations and can help determine at what intervals inventory checks are carried out (for example A class items may be required to be checked more frequently than c class stores.
Demand Amplification within the supply chain
Filed Under Blog
It comes as no surprise that actors within the supply chain (suppliers, distributors manufacturers etc) influence each other. The concept of an integrated network is nothing revolutionary and the cause and effect nature of these relationships has been at the center of various studies for many years.
An area of specific interest are the difficulties associated with schedule of supply and production to meet demand. Demand can be erratic with peaks and troughs commonplace within most organizations. These variations in requirements and supply are amplified within the supply chain when re-orders are made – this is then rippled through the tiers of the supply chain (distributors, manufacturers, raw material suppliers). Accommodating these fluctuation increases the cost of doing business by building inventory throughout and lengthening lead times.
Much of the early work in analyzing these patterns was carried out by Jay Forrester. Forrester was a systems theorist who utilized computer simulations to monitor the effect of interactions between actors and industrial business cycles.
The research carried out by Forrester focused on the disturbance to the supply chain as a result of reorder patterns. He used computer simulation to demonstrate the distortion of order information that occurs along the supply chain demonstrating that fluctuations in demand patterns had dramatic affect on inventory levels and manufacturer output. Through computer simulation, in one case Forrester was able to demonstrate that a 10 per cent increase in sales rippled through suppliers and distributors (through increased inventory holdings) to an output increase by manufactures of 40% resulting in unnecessary costs.
Forrester showed that the lag in information between supplier chain participants produced medium term demand amplification which rippled through the supply chain. In understanding the nature of the integrated supply chain and the need to ensure the smooth flow of information and materials, Forrester was perhaps an early pioneer of supply chain management
The subject of demand amplification has been researched by various professionals apart from Forrester. Jack Burbidge carried out studies around the same time as Forrester (early 1960’s) and identified similar issues (although focused on the topic from a manufacturing perspective and focused on short term demand amplification as a result of internal decisions on the timing and size of batches).
Despite Forresters work being carried over 50 years ago – it’s still acutely relevant today – and modern improvement programs often utilize the theory – overlaying it on modern organizations, recognizing similar patterns and reviewing how improved communication
and sharing of information and forecast data can reduce the bullwhip effect that Forrester defined.