ABC ANALYSIS

UNITED INTERNATIONAL UNIVERSITY

MGT 3224: Operations Management

Section – B
Group Assignment on ABC Analysis

Prepared For
Mimnun Sultana
Assistant Professor
United International University

Prepared by Group 8
Members' Name ID Email Contact Number
Sayma Sultana Lina 114171017 [email protected] 01687366931

Umaimah 114172009 [email protected] 01616669395

Sabbir Hossain 121171008 [email protected] 01834333347

Syed Saanzid Rahman Saan 111181152 [email protected] 01864026157

Date of Submission: September 21, 2020

 Introduction
All businesses carry inventories within a good range of items as, finished goods, MRO
(maintenance, repair, and overhaul), work in progress goods, and raw materials. Sometimes the
numbers will run into the thousands. Managing these inventories efficiently involves taking care
of two things which are what proportion to order and when to order. Doing this one at a time
for each item is neither efficient nor cost-effective, so inventories must be managed. They are
often the biggest manageable costs of production and represent significant portions of a
company’s assets.
ABC also called as Always Better Control. ABC analysis is an inventory management tool which
has been used to classify various inventory items into three major categories, A, B, and C based
on annual dollar volume. Class A items will have the annual dollar volume high, class B which
will have medium annual dollar volume and Class C will have the lowest annual dollar volume.
As a result, companies will be able to manage their inventories better and be more competitive
in the marketplace, as they will be able to focus on the inventories which have high dollar

1 volume. ABC Analysis and its Calculation

Objectives
The main objective of this analysis
is to secure economy through
efficient materials management.
Second, maintaining the flow of
production. Putting effort in
reducing in inventory cost and
high inventory turnover. And, to
stay obsolete items to minimum.
 Classification of ABC analysis
Firstly, the steps needed to conduct an ABC analysis are as follows:
1. Find out future use of each item of stock in terms of physical quantities for the review
forecast period.
2. Determine the price per unit for each item.
3. Determine the total project cost of each item by multiplying its expected units to be
used by the price per unit of such item.
4. Beginning with the item with the highest total cost, arrange different items in order of
their total cost as computed under step (3) above.
5. Express the units of each item as a percentage of total costs of all items.
6. Compute the total cost of each item as a percentage of total costs of all items.

This analysis is like the Pareto principle with the familiar rule ‘80/20’. Example of ABC class
2 are: ABC Analysis and its Calculation

Category Percentage of items Percentage of overall value

Class A-items 20% 80%

Class B-items 30% 15%

Class C-items 50% 5%

(Graph on the next page)

 Now if we see this on Pareto graph it will look like the demonstration given below:

5%
%
15%
% Annual Rev
Volume

80%
%

A B C

20% 30% 50%

% of Total Number of items

3 ABC Analysis and its Calculation

Policy guidelines:
Once the analysis has been done, the subsequent guidelines will be created in
respect of each category.

A-items: High consumptions value:

1. Develop class A suppliers more
2. Forecast A items more carefully
3. Purchasing department make maximum efforts to expedite and delivery
of these items
4. No safety stocks.
5. The stock report of 'A' items should be sent more frequently, say at least
once in 15 days.
 B-items: Moderate Value
1. Order quantities, re-order stocks and safety stock should be fixed and

revised for 'B' items at least one in every 4 to 6 months.

2. B items should be ordered less frequently than A items.

3. Low safety stock.

C-items: Low consumptions value

1. High safety stock
2. Bulk ordering once in 6 months

Advantages of ABC:
 This method helps businesses to maintain control over the costly items

4
which have large amounts of capital invested in them.ABC Analysis and its Calculation
 It provides a method to the madness of keeping track of all the inventory.
Not only does it reduce unnecessary staff expenses but more importantly it
ensures optimum levels of stock is always maintained.
 The ABC method makes sure that the stock turnover ratio is maintained at
a comparatively higher level through a systematic control of inventories.
 The storage expenses are cut down considerably with this tool.

Disadvantages of ABC:
 The analysis will not be effective if the materials or items are not classified
into the groups properly.
 It may add extra cost for running the analysis in some business, so it is not
suitable for every organization.
  It is very time consuming to constantly re-evaluate the A, B and C items and
look for signs of movement as the categorization gets out of date quickly.
 Since this analysis takes into consideration the monetary value of the items,
it ignores other factors that may be more important for your business.

We have taken Unilever items of total 40, to run the ABC analysis and interpret
the results. We have taken finished items from 4 section under 3 categories.
1. Beauty
2. Home Care
3. Food
We have done the calculations by using MS. Excel software and had pasted here.
The following data set will show the whole ABC analysis and its interpretation.

5 ABC Analysis and its Calculation

(Table on the next page)

 ABC Analysis Calculation Table
% of
ITEM ANNUAL UNIT ANNUAL
ANNUAL
ITEM NAME STOCK VOLUME COST TAKA CLASS
TAKA
SERIAL (units) (taka) VOLUME
VOLUME
Moisture-enriched softening toner #BU09 70000 780 54600000 17.59% A  
Sensitive soloyion soothing cleansing gel #BU08 45000 650 29250000 9.42% A  
Collagenic Set #BU07 32000 900 28800000 9.28% A  
Vaseline intensive care cocoa radiant gel oil #B05 25000 780 19500000 6.28% A  
leave-on hair supplements #BU04 40000 450 18000000 5.80% A  
Extra moisture body lotion #BU02 21000 800 16800000 5.41% A  
Perfecting-effect eye cream #BU05 65000 250 16250000 5.23% A 79.70%
Intensive Age-defense night cream #BU10 20000 700 14000000 4.51% A  
Mud treatment #BU03 33000 400 13200000 4.25% A  
ponds age miracle #B06 21000 600 12600000 4.06% A  
Vim Dishwash Gel Lemon #HC01 10000 900 9000000 2.90% A  
Radiance-C serum #BU06 12000 670 8040000 2.59% A  
Fair & lovely cream advanced Multi vitamin #B09 35000 210 7350000 2.37% A  
Bru Pure Coffee #F06 14000 450 6300000 2.03% B  
Bru Original Rich Aromatic Coffee #F05 12000 425 5100000 1.64% B  
6 Absolute white HS brightening night cream #BU01 10000 500 ABC Analysis and1.61%
5000000 its Calculation
B  
Colgate herbal toothpaste #B04 30000 150 4500000 1.45% B  
Bru Original Coffee #F04 10000 400 4000000 1.29% B  
Lifeboy handwash #B10 40000 95 3800000 1.22% B  
Sunsilk Shampoo perfect straight #B03 10000 335 3350000 1.08% B 15.13%
Dove go fresh roll on #B08 15000 220 3300000 1.06% B  
Surf excel Easy Wash #HC02 16000 200 3200000 1.03% B  
Lux shower gel #B02 15000 200 3000000 0.97% B  
HELLMANN'S Real Mayonnaise #F09 9000 300 2700000 0.87% B  
HELLMANN'S Light Mayonnaise #F10 9000 300 2700000 0.87% B  
Vaseline lip balm #B07 12000 186 2232000 0.72% C  
Surf excel Matic Liquid Front Load #HC03 5000 400 2000000 0.64% C  
Vim Dishwash Liquid #HC04 6000 300 1800000 0.58% C  
Rin Detergent Liquid #HC05 8000 195 1560000 0.50% C  
Cornetto Disc Vanilla Caramel Ice Cream #F07 20000 75 1500000 0.48% C  
Cornetto Classico Chocolate Ice Cream #F08 22000 65 1430000 0.46% C  
Lux beauty soap #B01 20000 48 960000 0.31% C  
Surf Excel washing powder #HC06 10000 85 850000 0.27% C  
Wheel Washing Powder Lemon Power #HC07 15000 45 675000 0.22% C 5.18%
Vim Dishwash Bar #HC08 25000 25 625000 0.20% C  
Wheel Laundry Soap #HC09 30000 20 600000 0.19% C  
Rin Power White #HC10 10000 59 590000 0.19% C  
Knorr Krispy Fried Chicken Mix #F02 10000 50 500000 0.16% C  
Knorr Thai Soup #F01 15000 25 375000 0.12% C  
Knorr Soup Hot and Sour Chicken #F03 15000 25 375000 0.12% C  
TOTAL   842000   310412000 100.00%    
 [ #HC = Home Care Products; #F = Food Products; #B = Beauty Products; #BU = Body Use Products ]

Math Rule & Interpretation

M N O Q

% of
ITEM ANNUAL UNIT ANNUAL
ANNUAL
ITEM NAME STOCK VOLUME COST TAKA CLASS
TAKA
SERIAL (units) (taka) VOLUME
VOLUME
Moisture-enriched softening toner #BU09 70000 780 54600000 17.59% A
Sensitive soloyion soothing cleansing gel #BU08 45000 650 29250000 9.42% A
Collagenic Set #BU07 32000 900 28800000 9.28% A
…. …. …. …. …. …. ….
…. …. …. …. …. …. ….
…. …. …. …. …. …. ….
Knorr Soup Hot and Sour Chicken #F03 15000 25 375000 0.12% C

TOTAL   842000   310412000 100.00%  

7 ABC Analysis and its Calculation

P
0

 Right after we gathered forty items with their imaginary annual volume (M) and unit
cost (N) respectively. We multiplied M & N to get annual volume in taka (O).
M*N=O
 Then we sorted the annual volume in taka (column O) from ascending to descending
values.
 Next, we added all forty annual volume in taka (O) and got total annual volume in taka
(P).
O1 + O2 + O3 + …. + On = P
(where n = 40)
 Once we got the total annual volume in taka as in P, we calculated percentage annual
volume in taka for all forty items using this following formula.
 ( O1 / P ) * 100%
[ O1 is for the first item, till 40th item (O40) using the same formula ]
 We were almost done, simply we used cumulative frequency rule and we kept adding
the percent values till we reached close to our goal for our class A item as in a sum of
80%, we were able to stop at 79.70%. All the respective items that fall under this range
is our class A item as shown on our calculated table above.
 So according to the theory of ABC classification the very next 15% or near to that should
be our class B items right after the first 80%. We continued from 79.70% till we added
another 15% to it by applying cumulative frequency rule again. We got 15.13%, under
which all the items represented class B as shown on our above calculated table.
 Lastly it was time for class C items which should be around 5% of total revenue. It was
the easiest part, from the point where class B item ends, the very next item till the last
one listed was class C item because adding all those percentage values gave us 5.18% as
shown on our above calculated table.

8 ABC Analysis and its Calculation

So, this is how we calculated the ABC classification for 40 products of Unilever Bangladesh,
and we got 79.70%, 15.13% & 5.18% values for class A, class B & class C items respectively
which is also interpreted just above. However, the calculation might not be greatly precise
due to our own estimated use of data, yet we were able to see the reflection of an actual
ABC classification throughout this very paper.