Purchasing and Financing 2024

5. STOCK CLASSIFICATION BASED ON TURNOVER
Student can carry out an ABC analysis and interpret the results.
The ABC analysis is an instrument to find out which goods have the highest turnover and
groups inventory items according to their importance for the purchasing management.
Vilfredo Pareto, an Italian economist, and political sociologist devised the law of the
'trivial many and the critical few', better known as Pareto's Law, or the 80:20 rule in 1906.
This rule says that, in many business activities, 80% of the potential value can be achieved
from just 20% of the effort, and that one can spend the remaining 80% of effort for
relatively little return.
The 80:20 Rule applies in almost any field, where 20% of the resources produce 80% of
the result. It's vital to understand that the reverse is also true; things that take up 80% of
your time and resources, will only produce 20% of your results.
So, if you have a product range, your effort should go into the 20% that give you 80% of
your sales. The ABC analysis helps you to identify these winners.
A-type items are very important for the company, highly needed and represent a high
stock value. B-type items are still rather important although to a lesser extent than the A-
type. C-type items are the stock of the least importance which means management
should allocate comparatively low attention to it.
In an ABC analysis an enterprise use the following classification:
A-type items: Represents 20 % or more of the total value purchased during a period.
B-type items: Represents 10 % to 20 % of the total value purchased during a period.
C-type items: Represents less than 10% of the total value purchased during a period.
EXAMPLE:
Statistics compiled by the purchasing department, shows the total quantity ordered and
their acquisition-purchasing price (APP) per unit during the previous period.
Item No. Units APP per unit
1 9 000 R20-00
2 10 000 R 3-00
3 5 000 R 1-00
4 2 000 R 1-50
5 1 000 R17-00
You are expected to complete the following table by using this information.
Step 1: Calculate the Value of Purchase for each item.
Value = Quantity x APP
Step 2: Calculate the Total Value of Purchases
Total Value = Value 1 + Value 2 + Value 3 etc.
9