Inventory classification


ABC Analysis

One of the widely used techniques for control of inventories is the ABC (always better control) analysis. The objective of ABC control is to vary the expenses associated with maintaining appropriate control according to the potential savings associated with a proper level of such control. For example, an item having an inventory cost of Rs. 100,000/- such as sheet steel, has a much greater potential for saving expenses related to maintaining inventories than an item with a cost of Rs. 100/-. The ABC approach is a means of categorizing inventory items into three classes ‘A’ , ‘B’ and ‘C’, according to the potential amount to be controlled.

The following procedure is suggested for developing an ABC analysis:

1. List each item carried in inventory by number or some other designation.
2. Determine the annual volume of usage and rupee value of each item.

3. Multiply each item’s annual volume of usage by its rupee value.

4. Compute each item’s percentage of the total inventory in terms of annual usage in rupees.

5. Select the top 10% of all items which have the highest rupee percentages and classify them as ‘A’ items.

6. Select the next 20% of all items with the next highest rupee percentages and designate them as ‘B’ items.

7. The next 70% of all items with the lowest rupee percentages are ‘C’ items.

HML Classifications

The High, medium and Low (HML) classification follows the same procedure as is adopted in ABC classification. Only difference is that in HML, the classification unit value is the criterion and not the annual consumption value. The items of inventory should be listed in the descending order of unit value and it is up to the management to fix limits for three categories. For examples, the management may decide that all units with unit value of Rs. 2000 and above will be ‘H’ items, Rs. 1000 to 2000 ‘M’ items and less than Rs. 1000 ‘L’ items.

The HML analysis is useful for keeping control over consumption at departmental levels, for deciding the frequency of physical verification, and for controlling purchases.

VED Classification

While in ABC, classification inventories are classified on the basis of their consumption value and in HML analysis the unit value is the basis, criticality of inventories is the basis for vital, essential and desirable categorization.

The VED analysis is done to determine the criticality of an item and its effect on production and other services. It is specially used for classification of spare parts. If a part is vital it is given ‘V’ classification, if it is essential, then it is given ‘E’ classification and if it is not so essential, the part is given ‘D’ classification. For ‘V’ items, a large stock of inventory is generally maintained, while for ‘D’ items, minimum stock is enough.

SDE Classification

The SDE analysis is based upon the availability of items and is very useful in the context of scarcity of supply. In this analysis, ‘S’ refers to ‘scarce’ items, generally imported, and those which are in short supply. ‘D’ refers to difficult items which are available indigenously but are difficult items to procure. Items which have to come from distant places or for which reliable suppliers are difficult to come by fall into ‘D’ category. ‘E’ refers to items which are easy to acquire and which are available in the local markets.

The SDE classification, based on problems faced in procurement, is vital to the lead time analysis and in deciding on purchasing strategies.

FSN Analysis

FSN stands for fast moving slow moving and non-moving. Here, classification is based on the pattern of issues from stores and is useful in controlling obsolescence.

To carry out an FSN analysis, the date of receipt or the last date of issue, whichever is later, is taken to determine the number of months, which have lapsed since the last transaction. The items are usually grouped in periods of 12 months.

FSN analysis is helpful in identifying active items which need to be reviewed regularly and surplus items which have to be examined further. Non-moving items may be examined further and their disposal can be considered.

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