Pure Plastics Inc. manufacture molded plastic pieces. A sample of their raw material inventory is shown in the table below:
Item Average Inventory (units) Value ($/unit)
128 400 3.75
234 300 4.00
233 120 2.50
236 75 1.50
239 60 1.75
240 30 2.00
678 20 1.15
784 12 2.05
821 8 1.80
831 7 2.00
911 6 3.00
A) How would the plant classify these items according to an ABC classification system?
B) How can Pure Plastics use this information?
To classify the items according to an ABC classification system, Pure Plastics Inc. can follow these steps:
Step 1: Calculate the annual value for each item by multiplying the average inventory (units) by the value per unit.
Item Annual Value ($)
128 1,500 (400 * 3.75)
234 1,200 (300 * 4.00)
233 300 (120 * 2.50)
236 112.50 (75 * 1.50)
239 105 (60 * 1.75)
240 60 (30 * 2.00)
678 23 (20 * 1.15)
784 24.60 (12 * 2.05)
821 14.40 (8 * 1.80)
831 14 (7 * 2.00)
911 18 (6 * 3.00)
Step 2: Sort the items based on their annual value in descending order.
Item Annual Value ($)
128 1,500
234 1,200
233 300
236 112.50
239 105
911 18
784 24.60
821 14.40
831 14
240 60
678 23
Step 3: Calculate the cumulative percentage of annual value for each item.
Item Annual Value ($) Cumulative Percentage
128 1,500 30% (1,500/5,000 * 100)
234 1,200 54% (2,700/5,000 * 100)
233 300 60%
236 112.50 63%
239 105 66%
911 18 68%
784 24.60 72%
821 14.40 75%
831 14 78%
240 60 84%
678 23 88%
Step 4: Classify the items based on the cumulative percentage.
Pure Plastics Inc. can classify the items into three categories:
- A category: Items with a high cumulative percentage (usually around 70-80%). In this case, items 128 and 234 fall into this category.
- B category: Items with a moderate cumulative percentage (usually around 15-25%). Items 233, 236, 239, 911, 784, 821, and 831 fall into this category.
- C category: Items with a low cumulative percentage (usually less than 10%). Items 240 and 678 fall into this category.
Now, let's move on to how Pure Plastics can use this information.
Using the ABC classification system, Pure Plastics can determine which items are more important and require closer monitoring and control. The classification helps in prioritizing inventory management efforts and optimizing stock levels. The categorization identifies the items that contribute most significantly to the company's inventory investment.
For example:
- Category A items, such as items 128 and 234, should be closely monitored due to their high value and contribution to the company's profits. Pure Plastics may want to ensure a higher level of security, efficiency and accuracy in handling these items, as any loss or delay can have a significant impact.
- Category B items, such as items 233, 236, 239, 911, 784, 821, and 831, require a moderate level of attention. Pure Plastics should monitor these items regularly to ensure that stock levels are maintained adequately to meet demand.
- Category C items, such as items 240 and 678, have a lower value and contribute less to the company's profits. Pure Plastics can allocate fewer resources to handle these items, and the focus can be on minimizing costs without affecting production.
By using the ABC classification system, Pure Plastics can optimize its inventory management, reduce carrying costs, improve order fulfillment, and allocate resources more efficiently based on the importance of each item.