Question

Borgki Enterprises has the following 10 items in inventory. Theodore Borgki asks you, a recent OM graduate, to divide these items into ABC classifications.

Item	Annual Demand	Cost/Unit	Annual Cost	Percent	ABC Classification
A2	2000	50
B8	4000	280
C7	1500	42
D1	6000	65
E9	1000	12
F3	500	450
G2	300	800
H2	600	35
I5	2600	200
J8	2500	40
Total	………………………..	.. ..…………….

Develop an ABC classification system for the 10 items.

How can Borgki use this information?

Answer 1

The ABC classification for inventory management is based on annual/monthly issue value of the inventory items in term of dollar where items are grouped into three categories as per their importance.

ABC classification:           

Top 70 - 80% items in term of value considered high value in value and classified as A

Next 15-30% items in term of value considered intermediary value and classified as B

Remaining 2 - 10% items in term of value considered low value and classified as C

Item	Annual Demand	Cost/Unit	Annual Cost (annual demand * Unit cost)	Percent (Annual cost/Total cost)
A2	2000	$50	$100,000	3.58%
B8	4000	$280	$1,120,000	40.13%
C7	1500	$42	$63,000	2.26%
D1	6000	$65	$390,000	13.97%
E9	1000	$12	$12,000	0.43%
F3	500	$450	$225,000	8.06%
G2	300	$800	$240,000	8.60%
H2	600	$35	$21,000	0.75%
I5	2600	$200	$520,000	18.63%
J8	2500	$40	$100,000	3.58%
Total			$2,791,000	100.00%

Now arrange then from highest percentage to lowest and classify them -

Item	Annual Demand	Cost/Unit	Annual Cost (annual demand * Unit cost)	Percent (Annual cost/Total cost)	ABC Classification	% in each Classification
B8	4000	$280	$1,120,000	40.13%	A
I5	2600	$200	$520,000	18.63%	A
D1	6000	$65	$390,000	13.97%	A	72.73%
G2	300	$800	$240,000	8.60%	B
F3	500	$450	$225,000	8.06%	B
A2	2000	$50	$100,000	3.58%	B
J8	2500	$40	$100,000	3.58%	B	23.83%
C7	1500	$42	$63,000	2.26%	C
H2	600	$35	$21,000	0.75%	C
E9	1000	$12	$12,000	0.43%	C	3.44%