To assign the items to their appropriate categories in an ABC inventory classification system, we need to categorize them based on their annual usage value. The ABC system typically divides items into three categories:
A-Items: High-value items that account for a significant portion of the total inventory value but represent a smaller proportion of the total quantity.
B-Items: Medium-value items that have moderate inventory value and usage.
C-Items: Low-value items that make up a large portion of the total quantity but contribute a relatively small part of the total inventory value.
To categorize the items, we need to calculate the annual usage value for each SKU using the formula:
Annual Usage Value = Quantity Used per year × Dollar Value per Unit ($)
Now let's calculate the annual usage value for each item:
SKU # Annual Usage Value
a-1 500 × $25.00 = $12,500
a-2 700 × $135.00 = $94,500
a-3 3,500 × $5.00 = $17,500
a-4 200 × $20.00 = $4,000
b-1 1,250 × $260.00 = $325,000
b-2 1,250 × $50.00 = $62,500
b-3 250 × $75.00 = $18,750
b-4 150 × $125.00 = $18,750
c-1 8,500 × $0.75 = $6,375
c-2 6,500 × $0.75 = $4,875
c-3 1,500 × $1.00 = $1,500
c-4 3,500 × $1.00 = $3,500
c-5 1,200 × $2.25 = $2,700
d-1 1,500 × $3.50 = $5,250
d-2 2,000 × $0.75 = $1,500
d-3 1,000 × $6.50 = $6,500
d-4 2,000 × $1.25 = $2,500
d-5 450 × $6.00 = $2,700
d-6 6,000 × $0.25 = $1,500
Now, we can rank the items based on their annual usage value and categorize them as follows:
A-Items: High annual usage value
1. SKU b-1: $325,000
2. SKU a-2: $94,500
B-Items: Moderate annual usage value
3. SKU a-3: $17,500
4. SKU a-1: $12,500
5. SKU b-2: $62,500
6. SKU c-1: $6,375
7. SKU d-3: $6,500
8. SKU d-1: $5,250
9. SKU c-2: $4,875
10. SKU d-5: $2,700
11. SKU c-5: $2,700
12. SKU a-4: $4,000
13. SKU d-4: $2,500
14. SKU b-4: $18,750
15. SKU d-6: $1,500
C-Items: Low annual usage value
16. SKU c-4: $3,500
17. SKU d-2: $1,500
18. SKU c-3: $1,500
Now, let's discuss the usefulness of the ABC system with reference to the above outcomes:
The ABC system is beneficial for inventory management because it helps the company focus on items that have the highest impact on its inventory costs and operations. By categorizing items based on their usage value, the company can allocate resources and attention more effectively.
Advantages of ABC inventory classification system:
1. Efficient Resource Allocation: The ABC system allows the company to allocate more resources and attention to high-value items (A-Items) that have a significant impact on inventory costs and profitability.
2. Inventory Control: It helps in better inventory control by ensuring that high-value items are managed more closely to avoid stockouts or overstocking, while low-value items (C-Items) can be managed with less intensive control.
3. Cost Reduction: By focusing on high-value items, the company can negotiate better prices and discounts with suppliers, leading to cost reduction.
4. Ordering Prioritization: The system helps in prioritizing the ordering and replenishment of items based on their importance, ensuring that critical items are always available when needed.
5. Risk Management: By closely monitoring high-value items, the company can reduce the risk of stockouts for crucial products and prevent potential losses in sales and customer satisfaction.
Overall, the ABC inventory classification system enables Belbice Shelving Company to optimize its inventory management strategies, reduce costs, and ensure smooth operations, enhancing its overall efficiency and profitability.