MGT 3501 Lecture Notes - Lecture 12: Racetrac
Lecture 12.2 — Inventory Management
Inventory Planning — ABC Method
● Maintaining inventory takes time and costs money
○ Takes a lot of personnel too
● Impossible to model all SKU’s
○ Hard to manage to sell all parts
○ Ex: Walmart
■ Hundreds of products
■ Hard to manage every single product, restocking in time, etc.
● What can we do?
○ Villefredo Pareto found that 20% of the world’s population controlled 80% of the
wealth
○ The 80/20 rule was born
■ Concentrate on the 20% first, then the 80%
○ Allows us to focus on the most important inventory items
● ABC Classification Scheme
A. High dollar volume/profit
B. Moderate dollar volume/profit
C. Low dollar volume/profit
●
○ Top 2 = A
○ Next 3 = B
○ Last 5 = C
■ If there’s no proper inventory level for a product in C, won’t be as
affected, don’t make as much profit
■ Need to focus on A, significant impact on profit
Document Summary
Maintaining inventory takes time and costs money. Hard to manage to sell all parts. Hard to manage every single product, restocking in time, etc. Villefredo pareto found that 20% of the world"s population controlled 80% of the wealth. Concentrate on the 20% first, then the 80% Allows us to focus on the most important inventory items. Abc classification scheme: high dollar volume/profit, moderate dollar volume/profit, low dollar volume/profit. If there"s no proper inventory level for a product in c, won"t be as affected, don"t make as much profit. Need to focus on a, significant impact on profit. Ex: seasonal fashion, daily newspaper, christmas trees. One time to make an order, and one season to sell, once season pass, no one will really purchase. One day to sell, when the day is over, the paper is now obsolete. Goal is to balance the risk out in maximum profits.
