A Category Items Comprise 20% of SKU & Contribute to 80% of $ spend.

B Category Items Comprise 30% of SKU & Contribute to 15% of $ spend.

C Category Items Comprise 50% of SKU & Contribute to 5% of $ spend.

The above is only an illustration and the actual numbers as well as percentages can vary.

Example: Table of Inventory Listing by Dollar Usage Percentage.

Item Annual Unit Cost- Usage in Dollars Percentage Frequenc
Usage in $ of Total y/Qtr
No. Units Dollar
Usage

1 5,000 1.00 5,000 1.96% 6

2 1,500 4.50 6,750 2.65% 6
3 10,000 14.00 140,000 54.96% 3
4 6,000 2.00 12,000 4.71% 3
5 7,500 0.35 2,625 1.03% 3
6 6,000 11.00 66,000 25.91% 1
7 5,000 0.27 1,325 0.52% 1
8 4,500 0.45 2,025 0.79% 1
9 7,000 2.50 17,500 6.87% 1
10 3,000 0.50 1,500 0.59% 1
Total $254,725 100.00% 26

Item Annual Unit Cost- Usage in Dollars Percentage Cumluative Frequenc

Usage in $ of Total %age y/Qtr
No. Units Dollar
Usage

3 10,000 14.00 140,000 54.96% 54.96% 6

6 6,000 11.00 66,000 25.91% 80.87% 6
9 7,000 2.50 17,500 6.87% 87.74% 3
2 1,500 4.50 6,750 2.65% 90.39% 3
4 6,000 2.00 12,000 4.71% 95.10% 3
1 5,000 1.00 5,000 1.96% 97.07% 1
10 3,000 0.50 1,500 0.59% 97.65% 1
8 4,500 0.45 2,025 0.79% 98.45% 1
5 7,500 0.35 2,625 1.03% 99.48% 1
7 5,000 0.27 1,325 0.52% 100.00% 1
Total $254,725 100.00% 26
Analysis:

Step 4: Check how many items represent 80% of the total cost, how many represent the next 15 percent and
how many represent the remaining 5% or so. The portions may not be exact for all situations, but they
point out towards the few high cost items compared with the many less costly ones. As discussed in the class,
this is only a cost viewpoint and does not mean that a low cost item is unimportant from operational point of view.
It basically means that fluctuation/excesses/losses, etc in the high value items hit the organization harder than in
case of the low cost items, which can be managed by point of order purchasing methods, etc. We shall discuss that late
in the program.

Annual Price Annual Cumulative Divided byDivided by

S# Material Description Unit Usage per unit Cost $ Cost Total Cost Total Cost
%
1 Milk Powder lb 250,000 14.00 3,500,000 3,500,000 0.482338 48
2 Flavoring essence ml 10,000 120.00 1,200,000 4,700,000 0.647711 65
3 Flour lb 1,000,000 0.60 600,000 5,300,000 0.730397 73
4 Chocolate powder lb 150,000 3.50 525,000 5,825,000 0.802748 80
5 Food color ml 15,000 30.00 450,000 6,275,000 0.864763 86
6 Cocoa Powder lb 45,000 5.00 225,000 6,500,000 0.89577 90
7 Barley lb 200,000 0.95 190,000 6,690,000 0.921954 92
8 Honey lb 40,000 3.50 140,000 6,830,000 0.941248 94
9 Almonds lb 30,000 3.50 105,000 6,935,000 0.955718 96
10 Sugar lb 80,000 0.85 68,000 7,003,000 0.965089 97
11 Margarine lb 80,000 0.75 60,000 7,063,000 0.973358 97
12 Caraway lb 5,000 12.00 60,000 7,123,000 0.981626 98
13 Cinnamon lb 2,000 25.00 50,000 7,173,000 0.988517 99
14 Fenugreek lb 6,000 6.00 36,000 7,209,000 0.993478 99
15 Yeast lb 25,000 0.70 17,500 7,226,500 0.99589 100
16 Cloves lb 500 30.00 15,000 7,241,500 0.997957 100
17 Salt lb 30,000 0.45 13,500 7,255,000 0.999817 100
18 Citric Acid lb 1,200 1.00 1,200 7,256,200 0.999983 100
19 Recipe X lb 500 0.15 75 7,256,275 0.999993 100
20 Ingredient C lb 250 0.13 33 7,256,308 0.999998 100
21 Formulation Z lb 75 0.15 11 7,256,319 0.999999 100
22 Ingredient A lb 100 0.05 5 7,256,324 1 100
23 Ingredient B lb 50 0.03 2 7,256,325 1 100
Total Annual Cost = 7,256,325

Number of items = 23

Summary:

Only 17% of total items (4/23) represent 80% of the cost

Next 30% of the total items (7/23) represent 17% of the total cost
Remaining 52% of the total items (12/23) represent only 3% of the total cost
ssed in the class,
rational point of view.
ation harder than in
We shall discuss that later

Divided by

Materials that represent 80% of total annual cost

How many are these? Only 4 items

Materials that represent 17% of total annual cost

How many are these? The next 7 items

Materials that represent 3% of total annual cost

How many are these? All the remaining 12 items