PLANT LAYOUT

 Plant layout is a “technique of locating different machines and plant services

within the factory so that the greatest possible output of high quality at the
lowest possible total cost can be available”.

Objectives of Plant Layout and Material Handling:

Objectives of plant layout and corresponding objectives of material handling are
indicated in the following table:

Principles of Plant Layout:

Following are the basic principles of “best layout” which should be taken into
consideration by plant layout engineer and material handling engineer while
designing a plant layout:

1. Principle of over-all integration:

According to this principle, the best layout is one which integrates the man, materials,
machinery, supporting activities and any other such factors that result in the best compromise.

2. Principle of minimum distance:

According to this principle, other things being equal, the best layout is one in which men and
materials have to move the minimum distance between operations.

3. Principle of Flow:
Muther said that, other things being equal, the best layout is one which arranges the work area
for each operation or process in the same order or sequence that forms, treats or assembles the
materials.

4. Principle of Cubic Space:

According to this, the best layout is one in which all the available space both vertical and
horizontal is most economically and effectively used.

5. Principle of Satisfaction and Safety:

According to this other things being equal, the best layout is one which makes work satisfying,
pleasant and safer for workers.

6. Principle of Flexibility:
It means the best layout is one which can be adopted and re-arranged at a minimum cost with
least inconvenience.

Classification/Types of Plant Layout:

Keeping in view the type of industry and volume of production, there can be
following methods of layout:
(a) Line or Product Layout.

(b) Functional or Process Layout.

(c) Fixed Position Layout.

(d) Combination.

(a) Line or Product Layout:

This type of layout is very popular in mass production. In this layout only one product or one
type of product is produced in an operating area.
If all the processing equipment and machines are arranged according to the sequence of
operations of the product, the layout is called product type of layout. In this type of layout, only
one product of one type of products is produced in an operating area. This product must be
standardized and produced in large quantities in order to justify the product layout.

The raw material is supplied at one end of the line and goes from one operation to the next quite
rapidly with a minimum work in process, storage and material handling. Fig. 8.3 shows product
layout for two types of products A and B.

Suitability:
This is suitable for continuous process industries such as automobile manufacturing or chemical
industries.

Advantages:
1. It lowers the overall manufacturing time as product proceeds rapidly from operation to
operation without any handling.
2. Less space is needed for placing machines.
3. There is minimum of handling and transportation.
4. There is less work-in-process.
5. Better utilisation of machines and labour.
6. It minimises counting, inspecting, clerical work etc.
7. There is smooth flow of materials.
8. Promises for supply of products to customers are more reliable.
9. Use of gravity and power conveyors for material handling reduces the necessity of aisles.
10. Production control is simplified greatly.
Disadvantages:
1. When the model or type changes, the layout of machinery also requires a change.
2. All machines in the arrangement cannot be used to their maximum capacities.
3. The manufacturing cost rises with a fall in the volume of production.
4. If one or more lines are running light, there is great machine idleness.
5. Specialised and strict supervision is needed.
6. If any of the machines in the line breaks down the other machines have to remain idle till that
machine becomes again ready to commence operation.
7. For expansion purpose, it is not possible to add more machines.
8. Each worker performs job on a particular machine, so he is not skilled for other machines or
operations.
(b) Functional or Process Layout (Group Technology):
Under this arrangement each department or section is responsible for carrying out a particular
process and not a particular product as under line type layout. There are similar operations in
each department or section.

The process layout is particularly useful where low volume of production is needed. If the
products are not standardized, the process layout is more low desirable, because it has creator
process flexibility than other. In this type of layout, the machines and not arranged according to
the sequence of operations but are arranged according to the nature or type of the operations.
This layout is commonly suitable for non repetitive jobs.

Same type of operation facilities are grouped together such as lathes will be placed at one place,
all the drill machines are at another place and so on. See Fig. 8.4 for process layout. Therefore,
the process carried out in that area is according to the machine available in that area.

Suitability:
In this, similar equipment and similar machines are grouped together. This is very useful where
low volume of production is required.

Advantages:
1. Similar jobs are manufactured on similar machines, hence supervision is simple.
2. Less machines are required.
3. This offers great incentive for each worker to raise the level of performance.
4. There will be better control on precision or complicated process.
5. The layout is flexible, hence it can easily be managed to change in the rate of production, in
the design of products, in the methods of production or in the raw materials used.
6. Breakdown of any one machine does not affect production as its work can be done on a
standby machine.
7. Capital layout for machines is minimum.
8. New workers have better training facilities on the job. Workers know how to run various
machines in the group and also to set-up work.
9. Foremen become specialised in the performance of the job and know all about the
equipment’s and their operations.
Disadvantages:
1. Handling and back-tracking of materials is too much.
2. It makes necessary to plan and supervise the work of each department, each worker and
machine. This makes production control more difficult and more costly.
3. Generally more floor area is required.
4. Specialization creates monotony and there will be difficulty for the workers to find job in
other industries.
5. Total production cycle time is more due to long distances and waiting.
6. Routing and scheduling is more difficult, as the work does not flow through any definite
mechanical channels.
7. There are no cheaper and automatic devices for internal transportation.
8. Inspection of work for each operation is necessary as the material passes to the next
department. This results in more inspections and causes delay.
9. More training will be required to prepare the workers for the jobs.
(c) Fixed Position Layout:
This type of layout is the least important for today’s manufacturing industries. In this type of
layout the major component remain in a fixed location, other materials, parts, tools, machinery,
man power and other supporting equipment’s are brought to this location.

The major component or body of the product remain in a fixed position because it is too heavy
or too big and as such it is economical and convenient to bring the necessary tools and
equipment’s to work place along with the man power. This type of layout is used in the
manufacture of boilers, hydraulic and steam turbines and ships etc.

Advantages:
1. Capital investment is minimum.
2. Continuity of operations is ensured.
3. Less total production cost.
4. Less material movement.
Disadvantages:
1. Machines and tools etc. take more time to reach to the work place.
2. Highly skilled workers are required.
3. Complicated jigs and fixtures may be required in fixing jobs, tools etc.
(d) Combination Layout:
Now-a-days any one form of layout in pure state is rarely found. Therefore, a combination of any
of the three methods is formed according to the requirement of an industry. In factories, where
products are first manufactured and then assembled this method is mostly used.

Factors Affecting Plant Layout

//**PRIMARILY RELATIONSHIP BETWEEN MEN, MATERIALS AND MECHANINERY**//
Some of the major factors which affect plant layout are: (1) Policies of management (2) Plant
location (3) Nature of the product (4) Volume of production (5) Availability of floor space (6)
Nature of manufacturing process and (7) Repairs and maintenance of equipment and machines.

(1) Policies of management:

It is important to keep in mind various managerial policies and plans before deciding plant
layout.

Various managerial policies relate to future volume of production and expansion, size of the
plant, integration of production processes; facilities to employees, sales and marketing policies
and purchasing policies etc. These policies and plans have positive impact in deciding plant
layout.

(2) Plant location:

Location of a plant greatly influences the layout of the plant. Topography, shape, climate
conditions, and size of the site selected will influence the general arrangement of the layout and
the flow of work in and out of the building.

(3) Nature of the product:

Nature of the commodity or article to be produced greatly affects the type of layout to be
adopted. In case of process industries, where the production is carried in a sequence, product
layout is suitable. For example, soap manufacturing, sugar producing units and breweries apply
product type of layout. On the other hand in case of intermittent or assembly industries, process
type of layout best suited. For example, in case of industries manufacturing cycles, typewriters,
sewing machines and refrigerators etc., process layout method is best suited.

Production of heavy and bulky items need different layout as compared to small and light items.
Similarly products with complex and dangerous operations would require isolation instead of
integration of processes.

(4) Volume of production:

Plant layout is generally determined by taking into consideration the quantum of production to
be produced. There are three systems of production viz.,

(a) Job production:

Under this method peculiar, special or non- standardized products are produced in accordance
with the orders received from the customers. As each product is non- standardized varying in
size and nature, it requires separate job for production. The machines and equipment’s are
adjusted in such a manner so as to suit the requirements of a particular job.

Job production involves intermittent process as the work is carried as and when the order is
received. Ship building is an appropriate example of this kind. This method of plant layout viz.,
Stationery Material Layout is suitable for job production.

(b) Mass production:

This method involves a continuous production of standardized products on large scale. Under
this method, production remains continuous in anticipation of future demand. Standardization
is the basis of mass production. Standardized products are produced under this method by using
standardized materials and equipment. There is a continuous or uninterrupted flow of
production obtained by arranging the machines in a proper sequence of operations. Product
layout is best suited for mass production units.

(c) Batch production:

It is that form of production where identical products are produced in batches on the basis of
demand of customers or of expected demand for products. This method is generally similar to
job production except the quality of production.

Instead of making one single product as in case of job production a batch or group of products is
produced at one time, It should be remembered here that one batch of products has no
resemblance with the next batch. This method is generally adopted in case of biscuit and
confectionary manufacturing, medicines, tinned food and hardware’s like nuts and bolts etc.

(5) Availability of floor space:

Availability of floor space can be other decisive factor in adopting a particular mode of layout. If
there is a scarcity of space, product layout may be undertaken. On the other hand more space
may lead to the adoption of process layout.

(6) Nature of manufacturing process:

The type of manufacturing process undertaken by a business enterprise will greatly affect the
type of layout to be undertaken.

A brief mention of various processes is given us under:

(i) Synthetic process:
Under this process two or more materials are mixed to get a product. For example, in the
manufacture of cement, lime stone and clay are mixed.

(ii) Analytical process:

This is just the reverse of synthetic process. Under this method different products are extracted
from one material. For example, from crude oil, petroleum, gas, kerosene and coal tar etc. are
extracted.

(iii) Conditioning process:

Under this process the original raw material is given the shape of different products and nothing
is added to it. Jute is an important example of this kind.

(iv) Extractive process:

This method involves the extraction of a product from the original material by the application of
heat or pressure. This involves the process of separation, for example, aluminium is separated
from bauxite

(7) Repairs and maintenance of equipment and machines:

The plant layout should be designed in such a manner as to take proper care with regard to
repairs and maintenance of different types of machines and equipment being used in the
industry. The machines should not be installed so closely that it may create the problems of their
maintenance and repairs. It has been rightly said that “Not only should access to parts for
regular maintenance such as oiling, be considered in layout but also access to machine parts and
components when replacement and repair are fairly common”.
 PLANT LOCATION

Means –Establishment of industries in a particular location

Selection of region –factors

 Availability of raw materials

 Nearness to market
 Availability of power
 Transport facilities
 Suitability of climate
 Govt. policy
 Competition between state
 Disposal factor
 Availability of labour , etc.

Selection of plant Site-Factor

 Price of land
 Type of soil
 Waste disposal
 Expansion potential
 Communicati0n
 Availabilities of amenities
 Health of the locality
 Statutory consideration
 Flood & drought condition
 Right and title of the land
 Good scenery
 Attitude of local people
 Technology know-how
 Commercial service

Plant location factor

 Raw materials availability
 Markets
 Energy availability
 Climae condition
 Transportation facilities
 Water supply
 Waste disposal
 Labor supply
 Taxation and legal restriction
 Site characteristics
  Flood and fire protection
 Community factors
Primary factor
1. Raw material,
2. Market,
3. Labour,
4. Fuel and power, and
5. Transport.
(i) Availability of Raw Materials
(ii) Availability of labour.
(iii) Availability of Power and Fuel:
(iv) Availability of Transport and
Communication facilities
(v) Nearness to Market:
 Availability of raw materials
 Nearness to the market
 Availability of labor
 Transport facilities
 Availability of fuel and power
Secondary factor
1. Financial services,
2. Climate factors,
3. Personal factors,
4. External economies,
5. Momentum of an early start,
6. Historical factors,
7. Political stability,
8. Special concessions and benefits, and
9. Strategical considerations
(i) Nearness to adequate Banking and
credit facilities
(ii) Facilities of Repairs
(iii) Fire fighting facilities
(iv) Soil, Climate and Topography of a
place
(v) Govt, policies and regulations
(vi) Momentum of an early start
(vii) Industrial atmosphere
(viii) Personal factors:
(xi) Tastes and preferences of people
(x) Political and economic situation:
(xi) Possibilities of future expansion
(xii) Existence of competitive industries
(xiii) Availability of research facilities
 Suitability of climate
 Government policies
 Availability of finance
 Competition between states
 Availability of basic facilities(such as
schools, hospitals, housing and
  Availability of water recreation clubs, etc)
 Disposal of waste

BREAK EVEN ANALYSIS

 Break-even analysis entails the calculation and examination of the margin of safety for an entity
based on the revenues collected and associated costs.
 Analyzing different price levels relating to various levels of demand, an entity uses break-even
analysis to determine what level of sales are needed to cover total fixed costs.
 A demand-side analysis would give a seller greater insight regarding selling capabilities.

PERT chart (Program Evaluation Review Technique

 The program (or project) evaluation and review technique, commonly abbreviated PERT,
is a statistical tool, used in project management, which was designed to analyze and
represent the tasks involved in completing a given project.

Advantages

 PERT chart explicitly defines and makes visible dependencies (precedence relationships)
between the work breakdown structure (commonly WBS) elements.
 PERT facilitates identification of the critical path and makes this visible.
 PERT facilitates identification of early start, late start, and slack for each activity.
 PERT provides for potentially reduced project duration due to better understanding of
dependencies leading to improved overlapping of activities and tasks where feasible.
 The large amount of project data can be organized and presented in diagram for use in
decision making.
 PERT can provide a probability of completing before a given time.
Disadvantages

 There can be potentially hundreds or thousands of activities and individual dependency

relationships.
 PERT is not easily scalable for smaller projects.
 The network charts tend to be large and unwieldy requiring several pages to print and
requiring specially sized paper.
 The lack of a timeframe on most PERT/CPM charts makes it harder to show status although
colours can help (e.g., specific colour for completed nodes)
Example=

A PERT chart presents a graphic illustration of a project as a network diagram consisting of

numbered nodes (either circles or rectangles) representing events, or milestones in the project
linked by labelled vectors (directional lines) representing tasks in the project. The direction of
the arrows on the lines indicates the sequence of tasks. In the diagram, for example, the tasks
between nodes 1, 2, 4, 8, and 10 must be completed in sequence. These are
called dependent or serial tasks. The tasks between nodes 1 and 2, and nodes 1 and 3 are
not dependent on the completion of one to start the other and can be undertaken
simultaneously. These tasks are called parallel or concurrent tasks. Tasks that must be
completed in sequence but that don't require resources or completion time are considered to
have event dependency. These are represented by dotted lines with arrows and are
called dummy activities. For example, the dashed arrow linking nodes 6 and 9 indicates that the
system files must be converted before the user test can take place, but that the resources and
time required to prepare for the user test (writing the user manual and user training) are on
another path. Numbers on the opposite sides of the vectors indicate the time allotted for the
task.

The PERT chart is sometimes preferred over the Gantt chart, another popular project
management charting method, because it clearly illustrates task dependencies. On the other
hand, the PERT chart can be much more difficult to interpret, especially on complex projects.
Frequently, project managers use both techniques.

PERT chart for a project with five milestones (10 through 50) and six activities (A through F). The project has
two critical paths: activities B and C, or A, D, and F – giving a minimum project time of 7 months with fast
tracking. Activity E is sub-critical, and has a floatof 1 month.

CRITICAL PATH MATHOD (CPM)

 The critical path method (CPM), or critical path analysis (CPA), is
an algorithm for scheduling a set of project activities.It is commonly used in conjunction with
the program evaluation and review technique (PERT).
 The Critical Path Method (CPM) can help you keep your projects on track.

Critical path schedules...

 Help you identify the activities that must be completed on time in order to complete the whole
project on time.
 Show you which tasks can be delayed and for how long without impacting the overall project
schedule.
 Calculate the minimum amount of time it will take to complete the project.
 Tell you the earliest and latest dates each activity can start on in order to maintain the schedule.

The CPM has four key elements...

 Critical Path Analysis

 Float Determination
 Early Start & Early Finish Calculation
 Late Start & Late Finish Calculation
Critical Path Analysis

The critical path is the sequence of activities with the longest duration. A delay in any of these activities
will result in a delay for the whole project. Below are some critical path examples to help you understand
the key elements...

Using the Critical Path Method (CPM)

The duration of each activity is listed above each node in the diagram. For each path, add the duration of
each node to determine it's total duration. The critical path is the one with the longest duration.

There are three paths through this project...

Use Critical Path

Analysis to find Your Critical Path

Float Determination

Once you've identified the critical path for the project, you can determine the float for each activity. Float
is the amount of time an activity can slip before it causes your project to be delayed. Float is sometimes
referred to as slack.

Figuring out the float using the Critical Path Method is fairly easy. You will start with the activities on the
critical path. Each of those activities has a float of zero. If any of those activities slips, the project will be
delayed.

Then you take the next longest path. Subtract it's duration from the duration of the critical path. That's the
float for each of the activities on that path.

You will continue doing the same for each subsequent longest path until each activities float has been
determined. If an activity is on two paths, it's float will be based on the longer path that it belongs to.
 Determining Float

Using the critical path diagram from the previous section, Activities 2, 3, and 4 are on the critical path so
they have a float of zero.

The next longest path is Activities 1, 3, and 4. Since Activities 3 and 4 are also on the critical path, their
float will remain as zero. For any remaining activities, in this case Activity 1, the float will be the duration
of the critical path minus the duration of this path. 14 - 12 = 2. So Activity 1 has a float of 2.

The next longest path is Activities 2 and 5. Activity 2 is on the critical path so it will have a float of zero.
Activity 5 has a float of 14 - 9, which is 5. So as long as Activity 5 doesn't slip more than 5 days, it won't
cause a delay to the project.

Early Start & Early Finish Calculation

The Critical Path Method includes a technique called the Forward Pass which is used to determine the
earliest date an activity can start and the earliest date it can finish. These dates are valid as long as all
prior activities in that path started on their earliest start date and didn't slip.

Starting with the critical path, the Early Start (ES) of the first activity is one. The Early Finish (EF) of an
activity is its ES plus its duration minus one. Using our earlier example, Activity 2 is the first activity on the
critical path: ES = 1, EF = 1 + 5 -1 = 5.

Critical Path Schedules

You then move to the next activity in the path, in this case Activity 3. Its ES is the previous activity's EF +
1. Activity 3 ES = 5 + 1 = 6. Its EF is calculated the same as before: EF = 6 + 7 - 1 = 12.

If an activity has more than one predecessor, to calculate its ES you will use the activity with the latest
EF.

Late Start & Late Finish Calculation

The Backward Pass is a Critical Path Method techique you can use to determine the latest date an
activity can start and the latest date it can finish before it delays the project.

You'll start once again with the critical path, but this time you'l begin from the last activity in the path.
The Late Finish (LF) for the last activity in every path is the same as the last activity's EF in the critical
path. The Late Start (LS) is the LF - duration + 1.

In our example, Activity 4 is the last activity on the critical path. Its LF is the same as its EF, which is 14.
To calculate the LS, subtract its duration from its LF and add one. LS = 14 - 2 + 1 = 13.

You then move on to the next activity in the path. Its LF is determined by subtracting one from the
previous activity's LS. In our example, the next Activity in the critical path is Activity 3. Its LF is equal to

Activity 4 LS - 1. Activity 3 LF = 13 -1 = 12. It's LS is calculated the same as before by subtracting its
duration from the LF and adding one. Activity 3 LS = 12 - 7 + 1 = 6.

You will continue in this manner moving along each path filling in LF and LS for activities that don't have it
already filled in.

In Conclusion...

The Critical Path Method is an important tool for managing your project's schedule. As you can see, it's
not very difficult to determine it's key elements. However, once your project has more than a few
activities, critical path scheduling can become tedious.

Key Steps in Critical Path Method

Let's have a look at how critical path method is used in practice. The process of using
critical path method in project planning phase has six steps.
Step 1: Activity specification
You can use the Work Breakdown Structure (WBS) to identify the activities involved in the
project. This is the main input for the critical path method.
In activity specification, only the higher-level activities are selected for critical path
method.
When detailed activities are used, the critical path method may become too complex to
manage and maintain.
Step 2: Activity sequence establishment
In this step, the correct activity sequence is established. For that, you need to ask three
questions for each task of your list.
  Which tasks should take place before this task happens.
 Which tasks should be completed at the same time as this task.
 Which tasks should happen immediately after this task.
Step 3: Network diagram
Once the activity sequence is correctly identified, the network diagram can be drawn (refer
to the sample diagram above).
Although the early diagrams were drawn on paper, there are a number of computer
softwares, such as Primavera, for this purpose nowadays.
Step 4: Estimates for each activity
This could be a direct input from the WBS based estimation sheet. Most of the companies
use 3-point estimation method or COCOMO based (function points based) estimation
methods for tasks estimation.
You can use such estimation information for this step of the process.
Step 5: Identification of the critical path
For this, you need to determine four parameters of each activity of the network.
 Earliest start time (ES) - The earliest time an activity can start once the previous
dependent activities are over.
 Earliest finish time (EF) - ES + activity duration.
 Latest finish time (LF) - The latest time an activity can finish without delaying the
project.
 Latest start time (LS) - LF - activity duration.
The float time for an activity is the time between the earliest (ES) and the latest (LS) start
time or between the earliest (EF) and latest (LF) finish times.
During the float time, an activity can be delayed without delaying the project finish date.
The critical path is the longest path of the network diagram. The activities in the critical
path have an effect on the deadline of the project. If an activity of this path is delayed, the
project will be delayed.
In case if the project management needs to accelerate the project, the times for critical
path activities should be reduced.
Step 6: Critical path diagram to show project progresses
Critical path diagram is a live artefact. Therefore, this diagram should be updated with
actual values once the task is completed.
This gives more realistic figure for the deadline and the project management can know
whether they are on track regarding the deliverables.
Advantages of Critical Path Method
Following are advantages of critical path methods:
 Offers a visual representation of the project activities.
 Presents the time to complete the tasks and the overall project.
 Tracking of critical activities.
Conclusion
Critical path identification is required for any project-planning phase. This gives the project
management the correct completion date of the overall project and the flexibility to float
activities.
A critical path diagram should be constantly updated with actual information when the
project progresses in order to refine the activity length/project duration predictions .

GANTT CHART

 A Gantt chart is a type of bar chart that illustrates a project schedule.

 Gantt charts illustrate the start and finish dates of the terminal elements and
summary elements of a project.
 Terminal elements and summary elements comprise the work breakdown
structure of the project.
 Modern Gantt charts also show the dependency (i.e., precedence network)
relationships between activities.
 Gantt charts can be used to show current schedule status using
percent-complete shadings and a vertical "TODAY" line as shown
here.
EXAMPLE1
 EXAMPLE2

INVENTORY
 I s a complete list of items such as property, goods in stock, or the contents of a
building.

Reasons for keeping stock

There are five basic reasons for keeping an inventory

1. Time - The time lags present in the supply chain, from supplier to user at every stage,
requires that you maintain certain amounts of inventory to use in this lead time. However, in
 practice, inventory is to be maintained for consumption during 'variations in lead time'. Lead
time itself can be addressed by ordering that many days in advance.
2. Seasonal Demand: demands varies periodically, but producers capacity is fixed. This can
lead to stock accumulation, consider for example how goods consumed only in holidays can
lead to accumulation of large stocks on the anticipation of future consumption.
3. Uncertainty - Inventories are maintained as buffers to meet uncertainties in demand, supply
and movements of goods.
4. Economies of scale - Ideal condition of "one unit at a time at a place where a user needs it,
when he needs it" principle tends to incur lots of costs in terms of logistics. So bulk buying,
movement and storing brings in economies of scale, thus inventory.
5. Appreciation in Value - In some situations, some stock gains the required value when it is
kept for some time to allow it reach the desired standard for consumption, or for production.
For example; beer in the brewing industry

ABC analysis

The ABC analysis (or Selective Inventory Control) is an inventory categorization technique. 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, and "C items" with the simplest
controls possible and minimal records.
The ABC analysis provides a mechanism for identifying items that will have a significant impact on
overall inventory cost,[1] while also providing a mechanism for identifying different categories of stock
that will require different management and controls.
The ABC analysis suggests that inventories of an organization are not of equal value. [2] Thus, the
inventory is grouped into three categories (A, B, and C) in order of their estimated importance.
'A' items are very important for an organization. Because of the high value of these 'A' items,
frequent value analysis is required. In addition to that, an organization needs to choose an
appropriate order pattern (e.g. ‘Just- in- time’) to avoid excess capacity. 'B' items are important, but
of course less important than 'A' items and more important than 'C' items. Therefore, 'B' items are
intergroup items. 'C' items are marginally important.

ABC analysis categories

There is no fixed threshold for each class, different proportion can be applied based on objective and
criteria. ABC Analysis is similar to the Pareto principle in that the 'A' items will typically account for a
large proportion of the overall value but a small percentage of the number of items.[3]
Examples of ABC class are

 ‘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.
Another recommended breakdown of ABC classes:

1. "A" approximately 10% of items or 66.6% of value

2. "B" approximately 20% of items or 23.3% of value
3. "C" approximately 70% of items or 10.1% of value
Example of the application of weighed operation based on ABC class
Actual distribution of ABC class in the electronics manufacturing company with 4051 active
parts.

Distribution of ABC class

ABC class Number of items Total amount required

A 10％ 70％

B 20％ 20％

C 70％ 10％

Total 100％ 100％

ALTERNATE

Inventory ABC Classification (as known as ABC Analysis) is a term used to define an inventory
categorization technique often used in materials management.

The ABC Classification provides a mechanism for identifying items that will have a significant impact on
overall inventory cost, while also providing a mechanism for identifying different categories of stock that
will require different policy settings and inventory control.

The ABC analysis is done to manage different stocked items (or SKU’s) that are not all equal in value or
order frequency. A best practice is for an organization to group their inventory into three categories (A, B,
and C).

 ‘A Classification’ items are very important for an organization. Because of the high demand of these
‘A’ items, frequent value analysis is required. These are your fast moving and typically lower value
items that drive the largest percentage of your target service levels and customer satisfaction rates.

 ‘B Classification’ items are important, but of course less important than ‘A’ items and more important
than ‘C’ items. These are typically mid range in inventory value and order frequency.

 ‘C Classification’ items are marginally important. Typically, very low order frequency and high
inventory value. These items are usually stocked with very low quantities or not at all due to the high
carrying costs associated with the stock levels.

When it comes to classifying your inventory it is usually safe to follow the Pareto Principle, also known as
the 80/20 rule. The Pareto Principle is the theory that most businesses see 80% of their sales come
from roughly 20% of customers, which should fall into your A classification category.

ABC Classification & The Pareto Rule for Inventory Management

ABC Classification of inventory management

ABC Classification for inventory management is a very similar approach. Classifying your inventory items
into A, B, C, and D (80%, 15%, 5%, 0%) based on sales volume is an industry best practice when
managing inventory.
The most common metric to use is your Annual Sales Volume when doing ABC Classification to calculate
your inventory for each group. For example, if you run the calculation and your A items represent 50% of
your inventory, you may not have enough inventory for these items to meet customer demand.

Special consideration needs to be taken for new and critical items in your inventory. For new products, it’s
an option to use yearly demand forecasting estimates to support demand estimates. For critical inventory
items, you need special monitoring so you don’t run out of stock on the essential items that might result in
customer turn elsewhere.

Economic order quantity(EOQ)

In inventory management, economic order quantity (EOQ) is the order quantity that minimizes the
total holding costs and ordering costs. It is one of the oldest classical production scheduling models.
ASSUMPTION OF EOQ