41. Alpha Products, Inc., is having a problem trying to control inventory. There

ID: 334111 • Letter: 4

Question

41. Alpha Products, Inc., is having a problem trying to control inventory. There is insufficient time to devote to all its items equally The following is a sample of some items stocked, along with the annual usage of each item expressed in dollar volume. Item Annual Dollar Usage $7,000 1,000 14,000 2,000 24,000 68,000 17,000 Item Annual Dollar Usage $80,000 400 1,100 30,000 1,900 800 90,000 900 12,000 1,700 3,000 2,300 32,000 a. Can you suggest a system for allocating control time? b. Specify where each item from the list would be placed

Explanation / Answer

It is not possible to pay equal attention to all the items . Prioritisation has to be made in terms of focusing on items which have higher annual usage. Such items are to be monitored more closely , while items with lesser annual usage will not need that close monitoring. Such prioritisation can be obtained using A-B-C- classification system.

For this, following needs to be done:

a)Arrange the items in descending order of annual Dollar usage

b)Sum up values of annual usage for all items which works out to $389100

c)Calculate Percentage of total usage of all items . Percentage of total usage = Annual Dollar usage/389100 x 100

d)Create another column Called “Cumulative percentage usage “ and fill up with relevant numbers. Cumulative percentage usage for any item will be equal to sum of percentage of total usage from beginning upto that item

e) Create Classification for each item as per following criteria:

All items with cumulative percentage usage value < = 80 will be termed as “ A “ class item

All items with cumulative percentage usage value > 80 and < = 90 will be termed as “B” class item

All items with cumulative percentage usage value > 90 and < = 100 will be termed as “C” class items

Refer below table for necessary illustration :

Item

Annual Dollar usage($)

Percentage of total usage( %)

Cumulative percentage usage

Classification

90000

23.13

80000

20.56

43.69

68000

17.48

61.17

32000

8.22

69.39

30000

7.71

77.10

24000

6.17

83.27

17000

4.37

87.64

14000

3.60

91.24

12000

3.08

94.32

7000

1.80

96.12

3000

0.77

96.89

2300

0.59

97.48

2000

0.51

98.00

1900

0.49

98.48

1700

0.44

98.92

1100

0.28

99.20

1000

0.26

99.46

900

0.23

99.69

800

0.21

99.90

400

0.10

100.00

TOTAL :

389100