According to ABC analysis, it is economical to stock more low-value items than high-value items. This is demonstrated with the example below. Assume that the ordering cost is the same for all kinds of items – A, B & C. Observe that the inventory holding costs are predominantly lower in the Scenario 2 than Total inv. costs in Scenario 1. Keeping the number of orders the same, Scenario 2 stocked less of the high-value items and ordered them more frequently. This helps in maintaining a low inventory value.
| Scenario 1 | ||||
| Item No. | Annual consumption Value | Number of Orders | Value per Order | Avg Inv. (0+Ann. Consumption Value/2) |
| A | 60000 | 4 | 15000 | 7500 |
| B | 4000 | 4 | 1000 | 500 |
| C | 1000 | 4 | 250 | 125 |
| 8125 | ||||
| Scenario 2 | ||||
| Item No. | Annual consumption Value | Number of Orders | Value per Order | Avg Inv. (0+Ann. Consumption Value/2) |
| A | 60000 | 8 | 7500 | 3750 |
| B | 4000 | 3 | 1333.33 | 666.67 |
| C | 1000 | 1 | 1000 | 500 |
| 4916.67 | ||||
SAP MM 
Leave a comment