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50 words agree or disagree to each question
Q1. BC analysis is a method of inventory classification that is designed to make the management of inventory easier and to ensure that the most valuable inventory for the business is always available to the consumer. The methodology behind ABC analysis is that a business sorts its inventory into three categories based on their price and consumption rate or level of importance to the business. The items that that are categorized as A or the ones that have the highest consumption rate, meaning that they either sell or are used more frequently so they they are more important the businesses daily operations. The items that are categorized as B and C follow the same methodology but are valued less or consumed less than A.
This analysis is used by inventory managers or business owners when they are deciding what items need to be purchased and kept on hand. In inventory management space is money. The reason Walmart has a clearance rack is because they can’t afford to store merchandise that doesn’t sale because they are constantly getting more inventory that has a higher classification. For example, if you walk into Walmart in the winter around Christmas there are a lot more toy and gift aisles then there are at any other time of the year. For this time of year toys and gifts are classified as A in the ABC analysis. After the season passes, the items left over are either stored in the back or placed on clearance to make room for the regularly classified A inventory or whatever seasonal inventory is deemed more important at that time. If a store like Walmart doesn’t have the space to stock gifts and toys around Christmas then consumers will shop somewhere else.
Walmart is an extreme example because they maintain a huge inventory and is rotating that inventory based on ABC analysis constantly. Smaller stores don’t have as much space and usually don’t tie up as much funds in inventory as Walmart. Consider an ice cream truck as the business using ABC analysis. The truck runs on gas, they sell ice cream, and cool they’re freezers with dry ice. Based on the ABC analysis the most important items to the business would gas and the dry ice. These items have the highest consumption rates and although they don’t generate any income for the business they are essential in the day to day operations. Without the gas and dry ice, the ice cream truck can’t get to its consumers and sell ice cream. The B in business would be the ice cream or particularly whichever brand or flavor is most purchased. C would be all of the other ice cream and items for sale as long as they do not have a higher consumption rate than B.
Q2. This week’s discussion is about ABC analysis, which classifies inventory into three groups ranging from most important to least important. For example, category A) very important, B) medium importance, and category C) least important category. Because category A is the most important, a lot of time is focused on forecasting and managing this inventory as it typically accounts for about 70% or more of the total dollar value of inventory but may only consist of 10% of all items in inventory. Category B typically represents about 20% of a company’s dollar value. Category C normally represents about 10% of the total dollar value of the inventory so not a lot of time is spent managing the inventory in this category as it wouldn’t be very cost effective to do so. This category may consist of 70% of all items in inventory (Render, Stair, Hanna & Hale, 2015).
In the following example, I am going to provide a hypothetical company that is able to manufacture batteries for electric vehicles. Therefore, it is not real, but I am going to use it only for the sake of discussion. Lets say a company name BUSN603 has three different types of batteries. Battery A is the best. It provides a range of 1 million miles per charge. One battery in category A costs $500K. Battery B is the second best. It provides a range of 1,000 miles per charge. It costs $50K. Then there’s category C inventory which consists of batteries that provide a range of 200 miles per charge. It costs $10K per battery. For this company, one battery in category C makes up only a fraction of Battery A (or 2% of dollar value). This company would spend a lot of time forecasting and managing the inventory they have for Battery A vs the other two batteries because it’s so much more expensive and makes up most of the company’s inventory dollar value and therefore sales. It would not be efficient to spend too much time managing the inventory in category C.
Render, B., Stair, R. M., Hanna, M. E., & Hale, T. S. (2015) Quantitative Analysis for Management (12th ed.) Pearson Education, Inc. [VitalSource Bookshelf]. Retrieved from https://bookshelf.vitalsource.com/#/books/9780133508383/cfi/6/100!/4/2/2/2/2@0:0