Subject Logistics and Supply Chain Management Topic Analysis of Inventory Submitted to Prof Vijay Kapoor TY BMS-B Group

up -6 University of Mumbai Sem - V

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Index Introduction ABC Analysis >Example Ease Of Control >Example Graphical structure of ABC analysis Methodology VED analysis FSN analysis Page No. 4 5

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Acknowledgement
Foremost, I would like to express my sincere gratitude to Prof. Vijay Kapoor for providing us such useful topic which has shed light on the inner workings of the materials management department My sincere thanks also goes to my fellow members for all the support and data gathering through various sources Thank you

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Analysis of Inventory
INTRODUCTION
There are number in any organization. It is rather difficult to control so many items. Different strategies have to be used to manage them. They can be handled in different groups. Each item may not be handled in same sense of importance. For example; The TV manufacturing company has TV tube as well as several screws of normal standards size. The tube is costing Rs. 1500, while the screws are costing Rs 2 each rather are readily available in the market. For the materials manager its specialty item TV tube is more important to plan as compared with the screws. Safety stock of screws will cost the company few hundred while a safety stock of 30 tubes would cost thousands. Obviously the investment for the screws is a much better value than investment for tubes, since it provides the same protection at a fraction of cost. Safety stocks almost always are a better value for low-cost items than they are for expensive ones. Modern inventory control system take this into account by classifying items by different attributes like value of usage, or other matters. Here we will see some methods to analyze the inventory materials.

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ABC ANALYSIS
The high value items have lower safety stocks because the cost of protection is high .the low-value items carry much higher safety stocks. The basic principles of ABC analysis is 10 percent of items hold 70 per cent of value. The basis of the ABC approach to inventory control, which provides maximum overall protection against stock outs for a given investment in safety stocks, assumes 10 per cent of items and 70 per cent of value of inventories for the most costly items. In every company, a big percentage of the investment in inventory is concentrated on relatively few high-value items. The first step in the ABC approach is to estimate average demand for each item in inventory and multiply this figure by unit cost determine value of usage.

Example
An item that costs Rs. 5 and has an annual consumption of 800 units would have a usage value of Rs. 4000, while an item that costs Rs.200 with a usage of only 100 units per year would have a usage value of Rs. 20000. Values of usage for each item are then listed in order of importance, with the maximum value volume item at the top of the list. The items are separated into three groups. The 10 per cent that are most costly are A category items; the next 20 per cent are B category items; and the balance items are c category items . In every case the items will account for a heavy percentage of total expenditure s and the C group will account for a surprisingly small percentage .The following relationship is typical;

Sorting Of items in a group

Category
A B C

Per cent of items

10 20 70

Per cent of value

70 20 10

Seven times as much as money is spent on items of A category items as on C items. The fact is that the A category items are almost one seventh as many as number of C category items .Thus the average expenditure of an A category item is many times greater than the average expenditure for a C category item .Investment in safety stock for the A item must be many times greater than for a C item in order to afford the same protection against stock outs.

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EASE OF CONTROL
The control is better since one can be select few items. The ABC system permits selective inventory control. Safty stocks are kept low for the high value items, which should be subject to extrmly close control by the materials personnel anyway. The low value good gets les attention from material personnel. Maintaining much higher stocks prevents stocks-outs.

With ABC control, its possible to risks fewer stock outs and reduce investments in inventories. company ABC control with overall control proves this inventories are divided into three classes : the expensive

(a) (b) (c) Example

Category items account for 10 per cent item for roughly 70 per cent of value. Items for 20 per cent of the total and about 20 per cent of the value. Items for 70 per cent of the total and about 10 per cent of the value.

A company stocks 1000 items in inventory and that its average investment is six weeks usage, or rs 1 million, of which 200000 is safety stock. With this order quantity and safety stock, assume that the company experiences ten serious stock-outs every year. These are distributed at random among 1000 items carried in inventory, and they are equally effective in disrupting production.
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Now suppose that company classifies its inventory by the ABC system. Its breakdown are as follows: Classification of inventory in a company

Category items A B C TOTAL

numbers of items

104 213 810 1127

Average inventory investment Rs 142000 40100 20300 202400

Investments in safety stocks

28400 8020 4060 40480

Them stocks-out each year are distributed at random among all the 1000 items. Thus the chances of a stocks-out on an A item are the same as those for any B or C item. However, since C items comprise 70 per cent of total number of items in inventories, it is reasonable to expect that 70 per cent of potential stocks-outs will occur on there items, with just 20 per cent on B items and 10 per cent on A category items. Thus under normal circumstances, the following pattern can be expected: one stocks-out on the 100 A category items; two on the 200 B items; and seven on 700 C items. Note the enormous differences in the prices paid for protection against stock-outs rs 700000 is tied up in inventory including rs 140000 in safety stock, to hold the stock-out rate to 1 per cent per annum on A category item.

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GRAPHICAL STRUCTURE OF ABC ANALYSIS

The classified items if plotted on a graph they will be shown as per the graph shown below. The y axis represents the value of the items in each category in percentage. Seven times as many C category items can be protected with a total safety stock investment only one seventh of that required on the A items. Thus the average investment only one seventh in safety stock per A category item is rs1400 and only Rs 28.57 for each C category item. Better protection against stock outs can be provided at much lower cost by concentrating investment on the cheaper items,where protection can he bought more cheaply.

For example, the company might to get along with not more than two weeks average inventory of A items, of which only
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one half week is safety stock. The B items might not be changed at all, while safety stocks of C items would be doubled, leaving order quantities unchanged. In practice, it probably is not necessary to suffer any increase in stock outs of of A category items. With the ABC approach the company has not only different inventory policies for the more expensive items but also different control procedures. Because there are so few A items, it may be economic to review their inventory status almost daily to spot deviations in demand and to maintain extremely close follow up on suppliers to make certain they adhere to lead times. In other words, on costly items, tight control is substituted for the protection of inventory. This is economic, since it permits substantial reductions in inventory investment. For the low cost items, it is cheaper to carry inventory than to pay the salaries of the personnel required to keep close control. It would take seven times as much efforts to maintain tight control over the 810 'C' category items as it would for the 104 'A' category items, and it would be possible to reduce investment in C items by only one seventh as much as the reduction in the investment for A items. With the B items, a middle of the road policy would probably be followed. There would be some control, but the company would also rely to a greater extent on inventories to protect against stock outs than it would with the A category items. Therefore, inventory control has to be exercised selectively. Depending upon the value, criticality and usage frequency of an item we may have to decide on an appropriate type of inventory policy. The selective inventory management thus plays a crucial role so that we can put our limited control efforts more judiciously to the more significant group of items. In selective management we group items in few discrete
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categories depending upon value; criticality and usage frequency. Such analyses are popularly known as ABC analysis.

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METHODOLOGY
To prepare an ABC types curve we may follow the following simple procedure: i. Arrange items in the descending order of the annual usage value.

Annual usage value = Annual demand * Unit price.

ii.

Identify cut off points on the cure when there is a perceptible sudden change of slope or alternatively find cut off points at top 10% next 20% or so but do not Interpret these too literally rather as a general indicator.

VED and FSN Analysis are also helping the material manager to do grouping to help to better control. This type of grouping may form the starting point in introducing scientific inventory management in an organization. This are based on very universal Paretos Law that in any large number we have significant few and insignificant many. The principle says only 20% of the items may be accounting for the 50% of the total material cost annually. These arc the significant few, which require utmost attention.

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VED Analysis
V = Vital items. E = Essential items. D = Desirable items.

There is no point in just controlling inventory of the items from the point of view of money blockage. Some of the items are in C category. But they are critical. They need better attention in view of production hold up. VED analysis attempt to classify items into three categories depending upon the consequences of material stock out when demanded. As stated earlier, the cost of shortage may vary depending upon the seriousness of such a situation. Accordingly the items are classified into V (vital), E (essential), D (desirable) categories.

Vital items are the most critical having extremely high opportunity cost of shortage and must be available in stock when demanded. Essential items are quite critical with substantial cost associated with shortage and should be available in stock by and large. Desirable group of items do not have serious consequences if not available when demanded but can be stocked items.

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The percent risk of shortage with vital group of items has to be quite small. These are calling for a high level of service. With Essential category we can take a relatively higher risk of shortage and for Desirable category even higher. Even a Cclass item may be vital or an A-class item may be Desirable.

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FSN ANALYSIS
F -stands for fast moving items S -stands for slow moving items, and N- Stands for non moving items All items do not get consumed in the same rate. they are not required with the same frequency ,some materials are quite regularly required some others are required very occasionally and some materials may have become obsolete and might not have been demanded for years together .FSN analysis groups them into three categories as: Fast moving Slow moving Non moving (dead stock) Inventory policies and models for these categories have to be different .All the inventory theories have been talking about the fast moving items , which show regular consumption pattern many spares parts , raw-materials ,development items Come under the slow moving category .these have to be managed on different basis. In the grown up Organizations many non moving items create dead stock in the stores appropriate guidelines are required to deal with the slow moving and dead stock items

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BIBLIOGRAPHY
WWW.GOOGLE.COM Logistics and scm z analysis of inventory. Analysis of inventory + .ppt BOOK OF VIPUL PRAKASHAN, S.D.APHALE.

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GROUP MEMBERS:Ram Chandra-192 Nikunj Panchal-193 Vinay Pardeshi-194 Chintan Parekh-195 Paras Parekh-196 Divya Patel-197

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