Inventory management is often a tedious and time-consuming task, so many companies turn to inventory optimization solutions to help. These solutions categorize inventory by dollar volume, which ensures that the most expensive items are given the most costly storage spaces. All except which of the following statements about abc analysis are true?
A. It is a type of easy analysis.
B. It is an application of the ABC inventory classification method.
C. The abc analysis method seeks to categorize inventory items by the dollar value of their sales in order to choose optimal storage locations for those items.
D. Its goal is to find the five best categories for inventory classification, based on dollar value sold and storage costs per unit, then organize all inventory in the most efficient manner possible.
Unexpected Ways Inventory May Be Categorized By Measures Other Than Dollar Volume :
1. Unit-Based
This format is a simple form of inventory classification, which does not give any consideration to the dollar volume of items, simply listing each item by its total quantity and weight. This method requires physical inventory counts for each item, which are impractical in high-volume distribution warehouses. It also uses less space and time than other inventory management techniques. However, it is limited because it does not consider whether an item is seasonal or infrequent; i.e., whether its sales pattern implies that the unit price will increase or decrease over time.
2. Weighted by Dollar Amount Sold
This method attempts to categorize inventory into different groups based on the amount sold for a given quantity in a particular time period (e.g. the last 30 days). This is the same as analyzing each item on a volume basis, except that an average unit price can be calculated instead of a volume value.
3. Weighted by Total Cost
This approach divides items into groups based on their total cost to the business, calculated by summing the cost of the materials and labor required to produce or distribute them. This approach allows items to be grouped based on different quantities and unit prices, which can be easily adjusted for seasonal or infrequent items by simply changing the calculation used for each item.
However, this method does not consider other factors in determining where to store these items in a warehouse; i.e., whether an item is seasonal or infrequent; i.e. whether its sales pattern implies that the unit price will increase or decrease over time.
4. Weighted by Unit Price per Unit
This method is similar to weighted by total cost. However, instead of calculating the total cost of materials and labor, a single fixed unit price is used to calculate the cost of production for the item (cost per unit). This calculation provides a more accurate picture of an item’s price than would be calculated by summing the costs for each unit; it also allows for easy adjustment for seasonal or infrequent items by simply changing the calculation used for each item.
5. Weighted by Dollar Volume by Weight
This method is similar to weighted by the dollar amount sold. However, instead of using the dollar volume value of each unit recorded in inventory to determine storage location, total weight is used as the measure of place in the warehouse. This requires a physical count for each item and can be problematic for large or heavy items; i.e., ones that are prone to falling over during storage or handling.
6. Weighted by Poundage per Unit
This method is a variation weighted by total cost. Rather than calculating a single unit price for each item, the cost of materials and labor required to produce or distribute items is calculated based on their total weight. This is more accurate than simply summing the costs for each item and it allows for easy adjustment for seasonal or infrequent items by simply changing the calculation used for each item.
7. Weighted by Time Period
In this method, the cost of an item is based on the time it takes to ship or service it. This approach has a number of potential variations: (1) storing inventory based on how long it will take to ship; (2) storing inventory based on how long it will take to sell; (3) comparing the efficiency of a warehouse in terms of both time and space used.
8. Weighted by Physical Space
This approach is based on the amount of physical space required to store items. In its simplest form, it requires a count of each item in storage to determine which storage locations contain the fewest items per cubic foot or square foot. This method can also be used to divide items into tiers based on dollar value, rather than physical space.
9. Weighted by Dollar Volume Shipped or Serviced
In this method, inventory is grouped by dollars sold for each product, rather than dollars or pounds sold for each item as in weighted by dollar volume or weighted by total cost. This method is limited, because only one product can be tracked at a time.
