How to do ABC Analysis / Classification ?

ABC analysis is a basic supply chain technique, often carried out by inventory controllers/materials managers, and is the starting point in Inventory control.

ABC classification is a system of categorization, with similarities to Pareto analysis and the method usually categorizes inventory into three classes with each class 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). Classification may be specific to the industry but typically follows 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.

How to carry out the actual analysis ? Carrying out ABC analysis is a bit tricky affair. What ultimately is done is to segregate all the inventory items into three categories viz. A, B & C. ABC analysis can be done for any given data that has money value as the prime factor. For example classification of pending suppliers' bills, items of an MRO or any type of inventory ,expenditure over a period of time, customers with respect to sale value etc. Let us take a typical example of inventory which we want to classify into A,B & C classes in respect to items.

Procedural steps : 1.First of all, collect all the data of the inventory and calculate the consumption or sale value. For a Stores, maintaining inventory, this shall be Quantity issued X unit rate of an item, say x1. Similarly , get the values for all the remaining items, say , x2,x3,x4....x100 in the following way :

Slno. 1 2 3 4 5 6 7 8 9 10

Item x1 x2 x3 x4 x5 x6 x7 x8 x9 x10

Unit rate 10 12 15 20 30 5 4 16 13 35

Consumption (Qty) issued) 10 10 12 5 2 100 80 12 22 6

2.Now, arrange all the consumption values in ascending or descending order of values. Let us assume we have listed in descending order (starting with highest consumption value item to lowest consumption value item). 3.Create next column and start adding the cumulative total of consumption value, starting from the top and finishing with the last item as given in the table below :
Consumption Value 100 120 180 100 60 500 320 192 286 210 Value in ascending order 60 100 100 120 180 192 210 286 320 500 Cumulative Value 560 1160 260 380 560 752 962 1248 1568 2068 x1 x4 x2 x3 x8 C x10 B x9 B x7 A x6 A Item x5 C C C C Class C

From the last column it is clearly evident that the bottom 20 % of items (x6 & x7) consume together nearly 70% of value, upper 70% (x1,x2,x3,x4,x5,x8) items consume only 20% value and the remaining 10% items (x9) consume 10% value. Respectively, these are A,B and C classes of items.

The ABC classification process is an analysis of a range of objects, such as finished products ,items lying in inventory or customers into three categories. It's a system of categorization, with similarities to Pareto analysis, and the method usually categorizes inventory into three classes with each class having a different management control associated :
A - outstandingly important; B - of average importance; C - relatively unimportant as a basis for a control scheme. Each category can and sometimes should be handled in a different way, with more attention being devoted to category A, less to B, and still less to C. Popularly known as the "80/20" rule ABC concept is applied to inventory management as a rule-of-thumb. It says that about 80% of the Rupee value, consumption wise, of an inventory

remains in about 20% of the items.

This rule , in general , applies well and is frequently used by inventory managers to put their efforts where greatest benefits , in terms of cost reduction as well as maintaining a smooth availability of stock, are attained. The ABC concept is derived from the Pareto's 80/20 rule curve. It is also known as the 80-20 concept. Here, Rupee / Dollar value of each individual inventory item is calculated on annual consumption basis.

Thus, applied in the context of inventory, it's a determination of the relative ratios between the number of items and the currency value of the items purchased / consumed on a repetitive basis :

10-20% of the items ('A' class) account for 70-80% of the consumption the next 15-

25% ('B' class) account for 10-20% of the consumption and

the balance 65-75% ('C' class) account for 5-10% of the consumption

Codification in Materials Management

by V S RAMA RAO on DECEMBER 1, 2008

Codification of materials can also be termed as the identification of materials. This deals with uniquely identifying each item in the inventory. It is useful in requisitioning items or the operational departments, in placing of orders by the purchase department, in receiving and expediting the items on receipt from the supplier, in having a unique record of each of the items in stores and in work-in-process or in warehouse so as to facilitate the control over the inventory levels, and also in having a good control over the loss,

deterioration, obsolescence, non-movement, or pilferage of the items in the inventory. Unique identification of the materials whether they are raw materials, work-in-process or finished goods is the first step towards a good materials management system. Without it, the control over inventory by rigorous exercises such as inventory techniques is not very effective. Without it, confusion might prevail in the operational departments. Moreover for a good quality control system a unique identification is a pre-requisite. There are many other advantages such as variety reduction and standardization etc. It is amazing to find that in many of our large public and private sector corporations, a considerable amount of inventory lies in the stores or elsewhere because of a confused nomenclature and a lack of proper identification system. Many items in inventory such as pipes, rods, angles, electrical switches, cables, valves, similar equipments, spare parts and even nuts, bolts and such items in inventory are available under different names and codes thereby reducing the actual availability of the item for operational needs. An item

may be called a nut and bolt by one section of the organization, whereas another may call it a fastener and because of this there are two separate requisitions made, two separate purchase orders sent out, and two separate inventory levels of the items built into the system. One section might call an item a pipe whereas another might call it a conduit in fact both sections using the same item. This increases the inventory level unnecessarily Prevention of duplication is one of the important benefits of a good materials coding system. Needless to say, for proper stock taking a good identification is of immense help. Many cases have been observed in large corporations where the concerned people do not even know what materials have been lying in the inventory for a large duration of time. These materials could easily be eliminated from the list, salvage value recovered and the storage space freed. It is also not uncommon to observe that although a material is available with the stores in reality due to duplication of the identity it is often quoted as not available and thus, many production programs suffer with consequent loss to the organization as a whole

Proper identification of inventory items helps in simplification of all the processes such as storing, receiving, procuring, manufacturing, warehousing and this results in a multiplicity of benefits to the company. It is a simple concept. If followed it might produce results of proportions equivalent to that of a rigorous application of the inventory control principles with, perhaps much less effort. Codification by Group Classification: What do we mean by coding? By this, we give a unique number to a particular item in the inventory. For instance, 010237 might mean a specific item in inventory such as a particular kind of gasket, of a certain material, of a certain shape, and of certain dimensions. Of course, each of these numbers or groups of numbers (within the total identification number) should convey some unique information. For instance, the following numbers might be used to describe the first classification of materials in an inventory: 01 Raw materials

02 Purchased components 03 Spare parts 04 Tools 05 Fixtures and Patterns 06 Other supplies 07 Work-in-process material 08 Finished goods 09 Capital Equipment The next classification group may be based on, say, shape of the items. For instance: 1 Wire 4 Bar 2 Tubing 5 Sheet 3 Rod 6 Strip Further classification could be based on the material of construction. For instance: 01 Mild Steel 02 Stainless Steel 304 03 Stainless Steel 316 04 Stainless Steel 05 Stainless Steel 06 Copper 07 Brass

08 Bronze 09 Aluminum 10 Special alloy 11 PVC 12 Polypropylene To this, one may add further classifications in terms of the composition, use, characteristics, etc. For instance, for metals we could have a group of classification as follows: 01 Cold rolled, 02 Tempered 03 Normalized 04 Annealed, 05 Hardened etc If the material is a wire, then the next group of classification could be in terms of the use characteristics such as: 01 5 amps 02 15 amps 03 25 amps Thus, an item could be coded as:

08 1 06 03 01 This nine digit code uniquely identifies the item as a Finished Product, Wire made of copper, Normalized for 5 amps performance. Codification as done above is called Codification by group classification where the identification is done by reserving a number of characters (spaces) for each group of classification. In each group the relevant details are sequentially numbered.
more at http://www.citeman.com/4466-codification-in-materials-management.html#ixzz1rpt2rpdc

Standardization supports the fundamental precepts of build-to-order and mass customization: All parts must be available at all points of use, not just "somewhere in the plant," which eliminates the setup to find, load, or kit parts. As a stand-alone program, standardization can reduce cost and improve flexibility.1

Standardization makes it easier for parts to be pulled into assembly (instead of ordering and waiting) by reducing the number of part types to the point where the remaining few standard parts can receive the focus to arrange demand-pull just-in-time deliveries. Fewer types of parts ordered in larger quantities reduces part cost and material overhead cost. The following practical standardization techniques are presented in all of Dr. Anderson's in-house seminars. Dr. Anderson is an experienced workshop facilitator who can help companies quickly implement standardization.
The Zero-Based Approach

Dr. Anderson has developed an easy-to-apply approach that is more effective than part type reduction measures, which require tremendous efforts for their return. Reducing active part numbers, say from 20,000 to 15,000 will, in fact, lower material overhead somewhat, but may not reach the threshold (eliminating part related setup) that would enable the plant to build products flexibly without delays and setups to get the parts, kit the parts, or change the part bins. This is a very effective technique to reduce the number of different parts (part types) by standardizing on certain preferred parts. This usually applies to purchased parts but it could also apply to manufactured parts. The methodology is based on a zero-based principle that asks the simple question: "What is the minimum list of part types we need to design new products?" Answering this question can be made easier by assuming that the company (or a new competitor) has just entered this product line and is deciding which parts will be needed for a whole new product line. One of the advantages of new competitors the ability to "start fresh" without the old "baggage:" too many parts. Just image a competitor simultaneously designed the entire product line around common parts. Now image doing the same thing internally. This is called the zero based approach. The zero based approach, literally, starts at zero and adds only what is needed, as opposed to reducing parts from a overwhelming list. An analogous situation would be cleaning out the most cluttered drawer in a desk, a purse, or a glove compartment; removing unwanted pieces would take much effort, and still not be very effective. The more effective zerobased approach would be to empty everything, and add back only the items that are essential. Where the "clutter" ends up is the difference in the approaches: in the drawer, purse or glove compartment or in the garbage

can. Similarly, parts reduction efforts have to work hard to remove the clutter (excess part variety) in the system, whereas zero-based approaches exclude the clutter from the beginning. The clutter is the unnecessary parts that would have not been needed if products were designed around common parts. Not only do these excess parts incur overhead costs to administer them, they also lower plant efficiency and machine utilization because of the setup caused by product that are designed to have more parts than can be distributed at every point of use. This approach determines the minimum list of parts needed for new designs and is not intended to eliminate parts used on existing products, except, when the common parts are functionally equivalent in all respects. In this case the new common part may be substituted as an equivalent part or a "better-than" substitution, where a common part with a better tolerance can replace its lesser counterpart in existing products. Even if part Standardization efforts only apply to new products, remember that in these days of rapid product obsolescence and short product life cycles, all older products may be phased out in a few years. When Dr. Anderson applied these techniques at Intels Systems Group, he reduced 20,000 active part numbers to 500 part types! Of 2,000 resistors, capacitors, and diodes, he reduced 2,000 to 35 values. Tool Standardization. A subject related to part Standardization is tool Standardization, which determines how many different tools are required for assembly, alignment, calibration, testing, repair, and service. Company-wide tool standardization can be determined as follows: Analyze tools used for existing products. Prioritize usage histories to determine the most "common" of existing tools. Work with people in manufacturing/service to determine tool preferences. Coordinate common tool selection with common partselection. Issue common tool lists with common parts lists. Feature Standardization. "Features" are any geometry that requires a separate tool like a drill, ream, hole punch, bend radii, and cutting tool bit for machine tools. These tools need to be standardized using the same procedures as parts. Raw Materials Standardization. If raw materials can be standardized, then the processes can be flexible enough to make different products without any setup to change materials, fixturing mechanisms, or cutting tools. Raw material Standardization can apply to bar stock/tubing, sheet-metal, molding/casting, protective coatings, and programmable chips.

Process Standardization. Standardization of processes results from the concurrent engineering of products and processes to ensure that the processes are actually specified by the design team, rather than being left to chance or "to be determined later." Processes must be coordinated and common enough to ensure that all parts and products in the mass customization platform can be built without the setup changes that would undermine flexible manufacturing. Example: auto-feed screwdrivers.

EFFECT ON SUPPLIERS

Standardization of parts helps part suppliers rationalize their product lines and allow them to: C reduce their overhead costs and subsidies, which allows them to be more cost competitive C improve their operational flexibility, resulting in better delivery. C simplify their supply chain management, C free valuable resources to improve operations and quality, implement better product development practices, and introduce new capabilities like build-to-order & mass customization. STANDARDIZATION BENEFITS C Cost Reduction

Purchasing costs reduced through purchasing leverage Inventory cost reduction Floor space reduction BOM/MRP/ordering expense avoided when common parts are simply drawn as needed from kanban resupply systems Overhead cost reduction

C Quality:

Product quality

Continuous Improvement Vendor reduction

C Flexibility:

Eliminating setup Inventory reduction Simplify supply chain management Internal material logistics Breadtruck deliveries Flexible manufacturing

C Responsiveness:

Build-to-Order Parts availability Quicker deliveries from vendor

Supply chain management (SCM) is the oversight of materials, information, and finances as they move in a process from supplier to manufacturer to wholesaler to retailer to consumer. Supply chain management involves coordinating and integrating these flows both within and among companies. It is said that the ultimate goal of any effective supply chain management

system is to reduce inventory (with the assumption that products are available when needed). As a solution for successful supply chain management, sophisticated software systems with Web interfaces are competing with Webbased application service providers (ASP) who promise to provide part or all of the SCM service for companies who rent their service. Supply chain management flows can be divided into three main flows: The product flow The information flow The finances flow The product flow includes the movement of goods from a supplier to a customer, as well as any customer returns or service needs. The information flow involves transmitting orders and updating the status of delivery. The financial flow consists of credit terms, payment schedules, and consignment and title ownership arrangements.

There are two main types of SCM software: planning applications and execution applications. Planning applications use advanced algorithms to determine the best way to fill an order. Execution applications track the physical status of goods, the management of materials, and financial information involving all parties. Some SCM applications are based on open data models that support the sharing of data both inside and outside the enterprise (this is called the extended enterprise, and includes key suppliers, manufacturers, and end customers of a specific company). This shared data may reside in diverse database systems, or data warehouses, at several different sites and companies. By sharing this data "upstream" (with a company's suppliers) and "downstream" (with a company's clients), SCM applications have the potential to improve the time-to-market of products, reduce costs, and allow all parties in the supply chain to better manage current resources and plan for future needs. Increasing numbers of companies are turning to Web sites and Web-based applications as part of the SCM solution. A number of major Web sites offer eprocurement marketplaces where manufacturers can trade and even make auction bids with suppliers. work in progress (WIP), advanced shipping notice (ASN), demand flow scheduling system, vendor-managed inventory (VMI), 3PL (third-party logistics)
RELATED GLOSSARY TERMS:

BULLWHIP EFFECT IN SUPPLY CHAIN

An effective supply chain management means efficient flow of quality and timely information between customer and suppliers which shall enable the supplier to uninterrupted and timely delivery of material to the customer But in practical life, there are situations which are never planned, and create oscillations in demand resulting in distortions in the supply chain. There can be a single cause or combinations of many factors. Suppliers, manufacturers, sales people, and customers have their own, often incomplete, understanding of what real demand is. Each group has control over only a part of the supply chain, but each group can influence the entire chain by ordering too much or too little. This lack of coordination coupled with the ability to influence while being influenced by others leads. Drivers of bull whip effect can be from Customers, suppliers, systems, processes, sales, manufacturing, external factors etc. The unplanned demand from retailer oscillates back to distributor to the organization and finally to the supplier with increased degree of magnitude at each leveling supply chain. Demand oscillation becomes higher while traveling up the supply chain resulting in overestimation at each level of the chain. The effect of Bullwhip effect is found in excess inventories, quality issues, higher manufacturing and over head costs, lost sales, lower levels of customer service , high transportation costs, lead time variations etc. For an ideal supply chain operations elimination of bullwhip effect is necessary . Though, bullwhip effect cannot be eliminated completely as there are other factors which are beyond the influence of suppliers and organizations like strikes, change in government policies, environmental factors, etc Some of the causes of Bullwhip effect are -

Government Policies Government policies also play a role in creating bullwhip effect in supply chain. For example in India, whenever government declares that price of Fuels (Motor Sprit, Diesel, LPG etc) shall be increased or decreased, the effect is visible on retail outlets. This in turn creates oscillations in supply chain and affects the planning at refinery.

Environmental Factors Environmental factor are beyond the control of the human control. If there is a sudden drop to 7 degrees in temperature at place where minimum temperature was never below 25 degrees then there shall be sudden demand for winter cloths , which was never forecasted by supply chain partners, leading to oscillations in the supply chain Sales Promotions Many organizations conduct sales promotions and these promotions affect the inventories but supply channels fail to understand the impact of these promotions. Organisations should conduct the complete analysis of what and how these sales promotions can affect the supply chain. False Orders Sometimes your customer may give you the orders for quantity more than his requirement because he has less confidence in you that you will be able to fulfill his demand on time so he places the orders more than his actual demand and hedges himself. When he reaches at a comfortable situation he cancels the balance orders. These canceled order quantities causes excess purchased inventory, under utilization of your capacities Sales personnel, who will not meet their targets for a particular time period will request the cooperative customer to increase the quantity and when the customer is not able to sell , he may cancel the order or may return the material partial or in full. Full Truck Load Incentive If your organization has a policy to provide incentive over transportation based on the utilization of the truck. In that case your customers keep on accumulating the order quantity and then release the demand. These kind of distortions affect your supply chain planning capabilities. Such freight incentive practices should be analyzed before actual implementation Demand Forecast Inaccuracies : If every supply chain partner is changing the demand forecasting by adding some percentage by his gut feeling then this hides the true customer demand.

Variability in the lead time Variability in the lead time is also another factor for Bullwhip Effect. Customers may not have confidence in your logistic operations because they have experienced in high variability in lead time in past. So when they are out of stock or having inventories lower than desired, they may create a panic situations leading to traveling up of incorrect information in the supply chain. Bull Whip effect can also be experienced by playing Beer Game. In this game there are four supply chain partners Retailer, Wholesaler, Distributor, and Manufacturer.

KAIZEN MEANING :

We'll look at Kaizen by answering three questions: What is Kaizen? What are the benefits of Kaizen? What do you need to do to get started using Kaizen principles? Kaizen was created in Japan following World War II. The word Kaizen means "continuous improvement". It comes from the Japanese words ("kai") which means "change" or "to correct" and ("zen") which means "good".

Kaizen is a system that involves every employee - from upper management to the cleaning crew. Everyone is encouraged to come up with small improvement suggestions on a regular basis. This is not a once a month or once a year activity. It is continuous. Japanese companies, such as Toyota and Canon, a total of 60 to 70 suggestions per employee per year are written down, shared and implemented. In most cases these are not ideas for major changes. Kaizen is based on making little changes on a regular basis: always improving productivity, safety and effectiveness while reducing waste. Suggestions are not limited to a specific area such as production or marketing. Kaizen is based on making changes anywhere that improvements can be made. Western philosophy may be summarized as, "if it ain't broke, don't fix it." The Kaizen philosophy is to "do it better, make it better, improve it even if it isn't broken, because if we don't, we can't compete with those who do." Kaizen in Japan is a system of improvement that includes both home and business life. Kaizen even includes social activities. It is a concept that is applied in every aspect of a person's life. In business Kaizen encompasses many of the components of Japanese businesses that have been seen as a part of their success. Quality circles, automation, suggestion systems, just-in-time delivery, Kanban and 5S are all included within the Kaizen system of running a business. Kaizen involves setting standards and then continually improving those standards. To support the higher standards Kaizen also involves providing the training, materials and supervision that is needed for employees to achieve the higher standards and maintain their ability to meet those standards on an on-going basis.

business process reengineering (BPR)

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Business process reengineering (BPR) is the analysis and redesign of workflow within and between enterprises. BPR reached its heyday in the early 1990's when Michael Hammer and James Champy published their best-selling book, "Reengineering the Corporation". The authors promoted the idea that sometimes radical redesign and reorganization of an enterprise (wiping the slate clean) was necessary to lower costs and increase quality of service and that information technology was the key enabler for that radical change. Hammer and Champy felt that the design of workflow in most large corporations was based on assumptions about technology, people, and organizational goals that were no longer valid. They suggested seven principles of reengineering to streamline the work process and thereby achieve significant levels of improvement in quality, time management, and cost: 1. Organize around outcomes, not tasks. 2. Identify all the processes in an organization and prioritize them in order of redesign urgency. 3. Integrate information processing work into the real work that produces the information. 4. Treat geographically dispersed resources as though they were centralized. 5. Link parallel activities in the workflow instead of just integrating their results. 6. Put the decision point where the work is performed, and build control into the process. 7. Capture information once and at the source.

By the mid-1990's, BPR gained the reputation of being a nice way of saying "downsizing." According to Hammer, lack of sustained management commitment and leadership, unrealistic scope and expectations and resistance to change prompted management to abandon the concept of BPR and embrace the next new methodology, enterprise resource planning (ERP).