Question

Classify the following items using the ABC inventory classification approach. Which items should be monitored most closely, and which one should have the least amount of safety stock?

Answer 1

ABC Analysis of all the items is as below:

We will calculate the total annual cost of each of the items in order to classify them under ABC analysis categories.

For item 1, total annual cost = 6.4*1700 = $10,800.00

For item 2, total annual cost = 7.8*7500 = $58,500.00

For item 3, total annual cost = 17.49*6240 = $109,137.60

For item 4, total annual cost = 44*260 = $11,440.00

For item 5, total annual cost = 105.99*150 = $15,898.50

For item 6, total annual cost = 345*300 = $103,500.00

The items which must be monitored closely are items 3, 6 and 2 since the total annual cost of these items are very high as compared to the other items.

The items which should have the least amount of safety stock are items 1, 4 and 5 since the total annual cost of these items is less as compared to other items.

Items 3 and 6 are in A category.

Item 2 is in B category.

Items 1, 4 and 5 are in C category.