Pareto Analysis.

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Pareto Analysis.

• ABC analysis.

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Pareto Analysis

• Operations Managers establish systems for
  managing inventory.
• Not all inventory carries the same weight e.g. if
  you sell white goods and a washing machine is
  pilfered this would have more effect than if
  someone pilfered the packet of Bold automatic
  supplied with each machine
• Some systems classify materials into groups
  dependant on their value to the organisation.this
  is called ABC analysis

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ABC Analysis

• In 1906 an Italian economist observed that a few
  items in any group constitute a significant
  proportion of the entire group
• He proposed the 80 /20 rule that eighty percent
  of the value is tied up in twenty percent of the
  inventory.
• If this be true managing this twenty percent of
  the inventory closely will control most of the
  costs oh having inventory

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ABC Analysis

• It is normal industrial practise to categorise
  stock items into three classifications
• A) Items for which the value /volume ratio is
  high. (15 80 of value)
• B) Items of medium value (up to 30 of items
  representing 15 of the spend)
• C) Items of small value(55 of items representing
  5 of the value)

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Pareto Analysis
OF ANNUAL SPEND
80
A items
B Items
C Items
0
40
100
20
10
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Pareto Analysis

• Why categorise?
• 1) If purchasing resources are scarce , time
  should be spent on developing suppliers that can
  benefit the company most.
• 2) A items should take up secure space,and
  undergo much more rigorous check than less value
  items.
• 3)Forecasting efforts should be more focused on
  getting stocks of these items right .
• 4) why waste time and money on close control of
  small value items the cost may far outweigh the
  benefits

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Pareto Analysis.

• To construct a Pareto chart, multiply the usage
  rate by the monetary value to get the Annual
  Requirement Value(ARV) and then list in
  descending order.
• The most important will appear at the top of the
  list.
• The cumulative ARV is then plotted against the
  number of items then a Pareto chart is obtained.

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Pareto Analysis