what is ABC analysis please describe briefly.
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Answer Posted / randy
ABC class coding for parts works for every aspect of a
Manufacturer. Primarily used for Purchasing Department to
determine quantity ordered and shipment dates.
The actual percentage varies from person to person and from
company to company. But as a basis rule:
Class "A" parts = 10% of the items - 70% value
Class "B" parts = 20% of the items - 20% value
Class "C" parts = 70% of the items - 10% value
In other words, in a Bill of Materials of a item
produced/assembled:
Class "A" = the top 10% of the items listed, represent 70%
of the total value of the item built.
Class "B" = the next 20% of the items listed, represent 20%
of the total value of the item built.
Class "C" = the next 70% of the items listed or remaining,
represent 10% of the total value of the item built.
This is just a guideline and can vary depending on what you
are manufacturing or assembling. Where I work, I have fine
tuned it to Class "A" = 20% of items represent 76% of cost,
Class "B" = 30% of items represent 17% of cost , Class "C" =
50% of items represent 7% of cost. But as a general rule to
start, "A" = 10%-70%, "B" = 20%-20%, "C" = 70%-10%.
Next is how much should I order and at what ship dates.
Since 70% of the cost is in the Class "A" items, this is
where you can control the inventory costs the most. I
generally use a 1-2 week ship date with a 2 week inventory
stock.
Class "B" items is generally a 4-8 week ship date with a 4
week inventory stock.
Class "C" items is generally 8 to 16 week ship date and a 8
week inventory stock.
This is also a good way to determine where you should spend
you time. 70% of your time is dealing with class "A" items,
20% of your time with Class "B" items, and 10% of your time
on Class "A: items.
By using these percentages, you can generally determine how
much dollars you should have in inventory at any one given
moment. If you don't have this formula in place now, a
slight increase in inventory levels and dollars might occur.
But within a few months, you will see the inventory levels
drop, your total inventory dollars be reduced, fewer
purchase orders being placed, and fewer problems with parts
not available for production.
If you find yourself always having problems when it comes to
the Purchasing Department, this is generally why. Not having
a ABC Class coding for all parts.
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