Pareto analysis-simplified J.Skorkovský, KPH What is it ? •tool to specify priorities •which job have to be done earlier than the others •which rejects must be solved firstly •which product gives us the biggest revenues •80|20 rule How to construct Lorenz Curve and Pareto chart •list of causes (type of rejects) in % •table where the most frequent cause is always on the left side of the graph • • Reject Type Importance Importance (%) Accumulative (%) 1 Bad size 10 71% 71 %=71% 2 Bad material 3 21 % 92%=71%+21% 3 Rust 1 8% 100 %=92%+8% Pareto chart Lorenz curve High priorities Use of PA in Inventory Management Statements I. •ABC analysis divides an inventory into three categories : –"A items" with very tight control and accurate records –"B items" with less tightly controlled and good records –"C items" with the simplest controls possible and minimal records. Statements II. •The ABC analysis suggests that inventories of an organization are not of equal value •The inventory is grouped into three categories (A, B, and C) in order of their estimated importance. Example of possible allocation into categories •A’ items – 20% of the items accounts for 70% of the annual consumption value of the items. •‘B’ items - 30% of the items accounts for 25% of the annual consumption value of the items. •‘C’ items - 50% of the items accounts for 5% of the annual consumption value of the items • Example of possible categories allocation-graphical representation (4051 items in the stock) ABC Distribution ABC class Number of items Total amount required A 10％ 70％ B 20％ 20％ C 70％ 10％ Total 100％ 100％ Objective of ABC analysis •Rationalization of ordering policies –Equal treatment –Preferential treatment See next slide Equal treatment Item code Annual consumption (value) Number of orders Value per order Average inventory 1 60000 4 15000 7500 2 4000 4 1000 500 3 1000 4 250 125 TOTAL INVENTORY (EQT) 8125 Preferential treatment Item code Annual consumption (value) Number of orders Value per order Average inventory 1 60000 8 7500 7500 2 4000 3 1333 666 3 1000 1 1000 500 TOTAL INVENTORY (PT) = 4916 TOTAL INVENTORY (EQT)= 8125 Determination of the Reorder Point (ROP) •ROP = expected demand during lead time + safety stock Determination of the Reorder Point (ROP) •ROP = expected demand during lead time + z* σdLT • where z = number of standard deviations and • σdLT = the standard deviation of lead time demand Example •The manager of a construction supply house determined knows that demand for sand during lead time averages is 50 tons. •The manager knows, that demand during lead time could be described by a normal distribution that has a mean of 50 tons and a standard deviation of 5 tons •The manager is willing to accept a stock out risk of no more than 3 percent Example-data •lead time averages = 50 tons. •σdLT = 5 tons •Risk = 3 % max •Questions : • –What value of z is appropriate? –How much safety stock should be held? –What reorder point should be used? – Example-solution •Service level =1,00-0,03 =0,97 and from probability tables you will get z= +1,88 – – See next slide with probability table Probability table Example-solution •Service level =1,00-0,03 =0,97 and from probability tables we have got : z= +1,88 •Safety stock = z * σdLT = 1,88 * 5 =9,40 tons •ROP = expected lead time demand + safety stock = 50 + 9.40 = 59.40 tons •For z=1 service level =84,13 % •For z=2 service level= 97,72 % •For z=3 service level = 99,87% – ABC and VED and service levels A items should have low level of service level (0,8 or so ) B items should have low level of service level (0,95 or so) C items should have low level of service level (0,95 to 0,98 or so) D items should have low level of service level (0,8 or so ) E items should have low level of service level (0,95 or so) V items should have low level of service level (0,95 to 0,98 or so) Matrix Resource : https://www.youtube.com/watch?v=tO5MmOBdkxk Prof. Arun Kanda (IIT), 2003