Question

What is ABC Analysis and on what theory is it based and what relevance does it have in Global Operations Management. Define and explain its attributes, features and rationale.

Answer 1

Definition of ABC analysis:
ABC analysis is a method of inventory control and management that includes a system that controls inventory and helps in the distribution management process. It is also called selective inventory control.

Relevance for global operations management, attributes, features and rationale:

• It is an integral process of inventory management at the global level and is used for unfinished goods, manufactured products, spare parts, components and even finished items.
• The process divides all the items into three categories A, B and C where A is the priority and most important and C is considered to be the least valuable item.
• This method helps the firm to control the costly inventory as it has a huge amount of capital investment involved.

Theory:

• In ABC analysis method item A is considered to be of highest value in terms of overall annual consumption. It becomes highly important to prioritise such items.
• Item B is mid value. The account for 30% of the overall inventory of the company and around 15-20% of consumption value.
• C items are the least value and account for 5% of consumption value using 50% of total items in the inventory.

Attributes, features and relevance:

• The ABC analysis is used in supply chain management and stock checking system. It helps the companies who want to focus on bringing down the working capital and carrying costs.
• The analysis helps to reduce excess stock and avoids making it obsolete. It helps to better utilise the working capital and improves efficiency by not keeping unhealthy inventory.
• Overall it helps the firm to keep check of its stock and maintain control over high-value items. It brings processes to re-ordering and ensures that the stock levels meet the demand.
• It holds high relevance at it ensures that stick turnover ratio is managed at a higher level by managing inventory with system and effectiveness.

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