Abc Analysis

Aims & Objectives
What is Inventory ?
Why Inventory Management is crucial for Hospitals?
ABC Analysis-Introduction
The Pareto principle
ABC Classification
Categories ‘A’, ‘B’ & ‘C’.
Steps in ABC Analysis
Example
Management policies for ABC categorization
Advantages & Disadvantages
Applications of ABC Analysis
Conclusion

BY Prince Gaurav Tiwari
Bundelkhand University Jhansi

1. BUNDELKHANDUNIVERSITY JHANSI
INSTITUTE OF PHARMACY
First Sessional Exam Assignment
ABC ANALYSIS
B.Pharm VII Semester
SESSION 2020-21
SUBMITTED TO: SUBMITTED BY:
Mrs. Nirmala Devi Prajapati Prince Gaurav Tiwari
Assistant Professor 171251016040
B.Pharm VII Semester

2. Contents:-
⮚Aims & Objectives
⮚What is Inventory ?
⮚Why Inventory Management is crucial for Hospitals?
⮚ABC Analysis-Introduction
⮚The Pareto principle
⮚ABC Classification
⮚Categories ‘A’, ‘B’ & ‘C’.
⮚Steps in ABC Analysis
⮚Example
⮚Management policies for ABC categorization
⮚Advantages & Disadvantages
⮚Applications of ABC Analysis
⮚Conclusion
⮚Reference

3. Aim & Objective
To use the ABC analysis method in order to optimize the economic
management of common medical device stocks at the pharmacy
level of our hospital
and the importance criterion set is the value of annual consumption.

4. What is Inventory?
Inventory managementis a systematic approach to sourcing,
storing, and selling inventory—both raw materials (components)
and finished goods (products).

5. Why Inventory Management is crucial for Hospitals?
⮚With the help ofInventory Management,any hospital or medical
store can keep preciseand updated stock records. Especially for
pharmaceuticalsand surgical equipment
⮚As pharmaceuticalsand surgicalequipmentare the most utilized
items/things in a hospital, each hospital should consistently keep up
a decent load of medicine stock.
⮚We know that medicines are costly and small surgery equipment is
also expensive. So, itreally importantfor healthcare department to
keep track of these items. The big investment is a huge and enough
reason to keep track.

6. What is ABC Analysis?
(ABC = Always Better Control)
ABC analysis is a type of inventory categorization method in which
inventory is divided into three categories, A, B, and C, in
descending value.
Abeing the most valuable items,
Cbeing the least valuable ones.
It helps to exercise selective control when confronted with large
number of items it rationalizes the number of orders, number of
items & reduce the inventory.

7. The Pareto principle
ABC analysis is derived from the The Pareto principle named after an
Italian economist VILFREDO PARETO also called the 80/20 rule. This
principle suggest that 80% of the total output is generated only by
20% of valuable efforts.
Ais 20% of items with 80% of total revenue and hence ask for tight
control
Bis 30% items with 15% revenue
Whereas
C is 50% of things with least 5% revenue and hence treated as most
liberal.

8. The Pareto principle

9. ABC Classification-Category A
‘A’ items –80% of the annual inventory value of your items (likely
made up of just 20% of your items)
⮚Very strict control
⮚Frequent ordering or weekly deliveries
⮚Weekly control statements
⮚Maximum follow-up and expediting
⮚Rigorous value analysis
⮚Accurate forecasts in materials planning
⮚Minimization of waste,
⮚obsolete and surplus (review 15 days)
⮚Individual posting
⮚Central purchasing and storage
⮚Maximum efforts to reduce lead time
⮚Must be handled by senior officers

10. ABC Classification-Category B
‘B’ items –15% of the annual inventory value of your items (likely made
up of 30% of your items)
⮚Moderate Control
⮚Once in three months
⮚Monthly control reports
⮚Periodic follow-up
⮚Moderate value analysis
⮚Two or more reliable sources
⮚Estimates based on past date on present R
⮚Quarterly control over surplus and items
⮚Small group postings
⮚Combination purchasing
⮚Moderate efforts
⮚Can be handled by middle management

11. ABC Classification-Category C
‘C’ items –5% of the annual inventory value of your items (likely made
up of 50% of your items)
⮚Loose Control
⮚Bulk ordering once in six months
⮚Quarterly control reports
⮚Follow-up and expediting in exceptional case
⮚Minimum value analysis
⮚Two reliable sources for each item
⮚Rough estimates for planning
⮚Annual review over surplus and obsolete material
⮚Group postings
⮚Decentralized purchasing
⮚Minimum clerical efforts
⮚Can be fully delegated

12. Categories ‘A’, ‘B’ & ‘C’.
Percentage of total usage value
Percentage of total Items
A
B C

13. Steps in ABC Analysis
The following steps are used for the classification of items into A, B
and C categories
1. Find out the unit cost and the usage of each material over a given
year
2. Multiply the unit cost by the estimated annual usage to obtain the
net annual value.
3. List out all the items and arrange them in the descending value.
(Annual Value)
4. Accumulate annual value and calculate cumulative percentage of
annual value.
5. Categorization and summary

14. Example
Step-1Find out the unit cost and the usage of each material over a
given year
Item Annual Usage
(UNITS)
Unit cost
(INR)
1 17 2.5
2 50 17
3 15 15
4 25 17
5 5 17
6 50 119
7 153 5
8 20 2.125
9 16 2.656
10 17 2.5

15. Example-CONT.
Step-2Multiply the unit cost by the estimated annual usage to
obtain the net annual value.
Item Annual Usage
(UNITS)
UNIT cost
(INR)
Annual Value
(INR)
1 17 2.5 42.5
2 50 17 850
3 15 15 225
4 25 17 425
5 5 17 85
6 50 119 5950
7 153 5 765
8 20 2.125 42.5
9 16 2.656 42.5
10 17 2.5 42.5

16. Example-CONT..
Step-3List out all the items and arrange them in the descending
value. (Annual Value)
Item Annual Usage
(UNITS)
Cumulative
Annual
Value
Cumulative
Annual
Value
(INR)
Category
Assigned
6 5590
2 850
7 765
4 425
3 225
5 85
8 42.5
1 42.5
10 42.5
9 42.5

17. Example-CONT…
Step-4Accumulate annual value and calculate
cumulative percentage of annual value.
Item Annual
Usage
(UNITS)
Cumulative
Annual
Value (INR)
Cum. %
Of Annual
Value (%)
Category
assigned
6 5950 5950 70 A
2 850 6800 80 B
7 765 7565 89 B
4 425 7990 94 C
3 225 8245 97 C
5 85 8330 98 C
8 42.5 8372.5 98.5 C
1 42.5 8415 99 C
10 42.5 8457.5 99.5 C
9 42.5 8500 100 C

18. Example-CONT….
Step-5Categorization and summary
Category Item % of Items
in
Inventory
Total
money
value
% of
Total
money
value
A 6 10% 5950 70%
B 2,7 20% 1615 19%
C 1,3,4,5,8,9,
10
70% 935 11%
Total 10 100% 8500 100%

19. Management policies for ABC categorization
Managing all the inventories in hospital will take personal time and costs money.
ABC classification shows that not all the inventories need to controlled with equal
attention.
ABC analysis for prioritization allows the management to decide which items
require most effort in controlling
⮚A-Items should have tight inventory control under more experienced
management. Re-orders should be more frequent.
⮚B-itemsrequire medium attention for control. An important aspect of class B is
the monitoring of potential evolution toward class A or, in the contrary, toward the
class C.
⮚C-itemsrequire minimum attention and may be kept under simple observation.
Re-ordering is less frequent.

20. Management policies for ABC categorization
Class Degree of
Control
Types of
Record
Frequency of
Review
Safety
Stock
A TightAccurate &
Complete
Continuous Low
B Moderate Good OccasionalModerate
C Loose Simple Infrequent Large

21. Management policies for ABC categorization
Activity Group A Group B Group B
Monitoring Very Strict Strict Moderate
Safety Stock To Be
Kept
Low Medium High
Level Of Control For
Issue
Tight Moderate Low
Estimates Of
Requirements
Very Accurate Moderately
Accurate
May Be Low
Frequency Of
Purchase
Most Frequent Less Frequent Least Frequent
Turnover Maximum Medium Turnover Least Turnover
Management
Involvement
Top Level Middle Level Lower Level

22. Advantages & Disadvantages
Advantages of ABC analysis :
1.This method helps businesses to maintain control over the costly items
which have large amounts of capital invested in them
2.It provides a method to the madness of keeping track of all the inventory.
Not only does it reduce unnecessary staff expenses but more importantly
it ensures optimum levels of stock is maintained at all times
3.The ABC method makes sure that the stock turnover ratio is maintained at
a comparatively higher level through a systematic control of inventories
4.The storage expenses are cut down considerably with this tool
5.There is provision to have enough C category stocks to be maintained
without compromising on the more important items

23. Disadvantages of ABC analysis :
1.For this method to work and render successful results, there
must be proper standardization in place for materials in the store
2.It requires a good system of coding of materials already in
operation for this analysis to work
3.Since this analysis takes into consideration the monetary value of
the items, it ignores other factors that may be more important for
your business. Hence, this distinction is vital
Advantages & Disadvantages

24. Applications of ABC Analysis
⮚Measures the degree to which actual consumption reflects public
health and morbidity.
⮚Reduces inventory levels and costs by arranging for more frequent
or delivery smaller quantities of class A items.
⮚Seeks major costs reductions by finding lower prices on class A
items
⮚Reduces inventory items that have limited use in the system but
costs the system large amount of money.
⮚Provides information for choosing the most cost effective
alternatives and finding opportunities for therapeutic substitutions
⮚Gathers information for pharmaco-economic analysis

25. Conclusion..
The ABC model works in a manner as to get prime attention to the
important items or the critical few and not have unnecessary
attention be spent on the not so important items or the trivial many.
Each category has a differing management control in place.
This prioritization of attention and focus is vital to keep the costs in
check and under control in the supply chain system. To get the best
results it is important that items that involve a lot of costs are given
the due management attention.

26. Reference
⮚Devnani M, Gupta A, Nigah R. ABC and VED Analysis of the Pharmacy
Store of a Tertiary Care Teaching, Research and Referral Healthcare
Institute of India. J Young Pharm. 2010;2(2):201–205.
⮚Antonoglou. D, Kastanioti. C, Niakas. D. ABC and VED Analysis of Medical
Materials of a General Military Hospital in Greece. Journal of Health
Management Vol 19, Issue 1, 2017.
⮚Manufacturing planning and control systems for supply chain
management By Thomas E. Vollmann.
⮚Ultsch, Alfred, Jörn Lötsch. "Computed ABC analysis for rational selection
of most informative variables in multivariate data." PLOS One 10.6 (2015):
e0129767.

27. Thank you