Operations and Supply Chain Management The Core

INVENTORY MANAGEMENT chapter 11 375
The ABC approach divides this list into three groupings by value: A items constitute
roughly the top 15 percent of the items, B items the next 35 percent, and C items the last
50 percent. From observation, it appears that the list in Exhibit 11.11A can be meaningfully
grouped, with A including 20 percent (2 of the 10), B including 30 percent, and C
including 50 percent. These points show clear delineations between sections. The result of
this segmentation is shown in Exhibit 11.11B and plotted in Exhibit 11.11C.
Segmentation may not always occur so neatly. The objective, though, is to try to separate
the important from the unimportant. Where the lines actually break depends on the
particular inventory under question and on how much personnel time is available. (With
more time, a firm could define larger A or B categories.)
The purpose of classifying items into groups is to establish the appropriate degree of
control over each item. On a periodic basis, for example, class A items may be more clearly
controlled with weekly ordering, B items may be ordered biweekly, and C items may be
ordered monthly or bimonthly. Note that the unit cost of items is not related to their classification.
An A item may have a high dollar volume through a combination of either low cost
and high usage or high cost and low usage. Similarly, C items may have a low dollar volume
because of either low demand or low cost. In an automobile service station, gasoline
would be an A item with daily or weekly replenishment; tires, batteries, oil, grease, and
transmission fluid may be B items and ordered every two to four weeks; and C items would
consist of valve stems, windshield wiper blades, radiator caps, hoses, fan belts, oil and gas
additives, car wax, and so forth. C items may be ordered every two or three months or even
be allowed to run out before reordering because the penalty for stock-out is not serious.
Sometimes an item may be critical to a system if its absence creates a sizable loss.
In this case, regardless of the item’s classification, sufficiently large stocks should be kept
on-hand to prevent runout. One way to ensure closer control is to designate this item an A
or a B, forcing it into the category even if its dollar volume does not warrant such inclusion.
Inventory Accuracy and Cycle Counting
Inventory records usually differ from the actual physical count; inventory accuracy refers
to how well the two agree. Companies such as Walmart understand the importance of
inventory accuracy and expend considerable effort ensuring it. The question is, How much
error is acceptable? If the record shows a balance of 683 of part X and an actual count
shows 652, is this within reason? Suppose the actual count shows 750, an excess of 67 over
the record. Is this any better?
Every production system must have agreement, within some specified range, between
what the record says is in inventory and what actually is in inventory. There are many reasons
why records and inventory may not agree. For example, an open stockroom area allows
items to be removed for both legitimate and unauthorized purposes. The legitimate removal
may have been done in a hurry and simply not recorded. Sometimes parts are misplaced,
turning up months later. Parts are often stored in several locations, but records may be lost
or the location recorded incorrectly. Sometimes stock replenishment orders are recorded
as received, when in fact they never were. Occasionally, a group of parts is recorded as
removed from inventory, but the customer order is canceled and the parts are replaced in
inventory without canceling the record. To keep the production system flowing smoothly
without parts shortages and efficiently without excess balances, records must be accurate.
How can a firm keep accurate, up-to-date records? Using barcodes and RFID tags is
important to minimizing errors caused by inputting wrong numbers in the system. It is
also important to keep the storeroom locked. If only storeroom personnel have access,
and one of their measures of performance for personnel evaluation and merit increases
is record accuracy, there is a strong motivation to comply. Every location of inventory