Page 392 - Orlicky's Material Requirements Planning

CHAPTER 21 Historical Context 371

The idea behind ABC is to apply the bulk of the (limited) planning and control
resources to the A items, “where the money is,” at the expense of the other classes that
have demonstrably much less effect on the overall inventory investment. The ABC con-
cept is to be implemented by controlling A items “more tightly” than B items, and so on.
Today, the principle of graduated control stringency may be somewhat difficult to com-
prehend, but in the precomputer days, the degree of control was equated with the fre-
quency of reviews of a given inventory item record. Controlling tightly meant reviewing
frequently. The frequency of review, in turn, tended to determine order quantity. A items
would be reviewed frequently and ordered in small quantities to keep inventory invest-
ment down. A primitive but fairly typical ABC implementation is represented by policies
shown in Table 21-2.

TAB LE 21-2
Sample Ordering Rules Under ABC Classification

Inventory Class Review Frequency Order Quantity
A Monthly 1 month’s supply
B Quarterly 3 months’ supply
C Annually 12 months’ supply

The rationale of ABC classification is the impracticality of giving an equally high
degree of attention to the record of every inventory item owing to limited information-
processing capacity. With modern computers and software, this limitation disappears
and the ABC concept becomes significantly less relevant. Every practitioner knows that
a single part, even one that is low in cost, can stop an entire shipment. Equal treatment of
all inventory items, as far as planning is concerned, now becomes feasible. In a modern,
well-implemented MRP system, every item, irrespective of its cost and volume, receives
the same degree of care, the same stringent treatment.
Possible policy exceptions are certain extremely low-cost items, especially pur-
chased ones, that may have safety stocks and be ordered in large quantities. These excep-
tions are made, however, not because of some inability of the computer system to plan
and maintain the status of such items but rather because of the impracticality of accurate
physical control. It simply does not pay to do exact counts of lock washers and cotter
pins. The cost of counting can be several times larger than the total cost of the parts.
Physical inventory control continues to be a problem in inventory management, and the
ABC concept, when applied in this area (to inspection, storage, frequency of cycle checks,
etc.), remains valid.
The techniques and concepts covered in the preceding discussion evolved during a
time when, owing to very limited information-processing capacity and software availabil-
ity, the precise pattern of future item demand could not be ascertained and reascertained;
neither could the status of every inventory item be updated and reevaluated with sufficient