Question

A company has 500 different inventory items in its warehouse. After conducting an ABC analysis, it is found that: Category A items: 20 items with a total value of $100,000 Category B items: 50 items with a total value of $50,000 Category C items: 430 items with a total value of $20,000 Calculate the percentage of total inventory value that each category represents. Also, calculate the percentage of the total number of items that each category represents. After the analysis, the company decides to implement a different inventory management strategy for each category. For Category A items, the company will use a continuous review system with frequent reorder points. For Category B items, the company will use a periodic review system with less frequent reorder points. For Category C items, the company will use an automated inventory management system. Explain the rationale behind these different inventory management strategies for each category and discuss the potential benefits and drawbacks of each strategy.

Answer 1

The total value of inventory is $170,000, with Category A items representing 58.82% of the value, though only 4% of items; Category B has 29.41% of the value and 10% of items; Category C has 11.76% of the value and 86% of items. Different management strategies—continuous, periodic review, and automated inventory management—are tailored to the value and number of items.

Step-by-step explanation:

The student has been tasked with calculating the percentage of total inventory value and the percentage of the total number of items that each category (A, B, C) represents, as well as discussing inventory management strategies for each category.

To calculate the percentages, we need the total value of all items, which is $170,000 ($100,000 + $50,000 + $20,000). Category A represents 58.82% of the total value ($100,000 / $170,000 * 100), category B represents 29.41%, and category C represents 11.76%. As for the total number of items, category A represents 4% (20/500 * 100) of the total items, category B 10%, and category C 86%.

The different inventory management strategies such as continuous review for high-value Category A items, periodic review for moderate-value Category B items, and automated inventory management for low-value, high-quantity Category C items are used to optimize inventory control, save cost, ensure supply chain efficiency, and manage different levels of demand and supply risk associated with each category.