Methods of Inventory Control | Materials Management

There are some selective inventory control methods to have an effective control on
the inventory. The important methods are:

1. ABC Analysis (Always Better Control)

2. VED Analysis (Vital, Essential, Desirable)

3. FSN Analysis (Fast, Slow moving and Non-moving)

4. SDE Analysis (Scarce, Difficult, Easy)

5. HML Analysis (High, Medium, Low)

6. Just-In-Time (JIT) Inventory System.

Method # 1. ABC Analysis:

One of the widely used techniques of inventory control is the ABC (Always Better
Control) analysis. This analysis is based on the annual consumption of inventory items
in a year.

It has been found that:

a. Only a small number of inventory items consume a very large share of inventory
consumption during the year.

b. A little larger number of inventory items covers a moderate share of annual

inventory consumption.

c. A very large number of items just cover a very small share of annual inventory
consumption.
These facts gave birth to the concept of ABC analysis. The ABC approach is a means of
categorizing inventory items into three classes ‘A’, ‘B’ and ‘C’.

a. Class A items:
10% of items have 70% of the annual inventory consumption.

b. Class B items:
ADVERTISEMENTS:

20% of the items have 20% of annual inventory consumption.

c. Class C items:
70% of the items have only 10% of the annual inventory consumption.

Class            Number of items                     Rupee value in items

A                     10% of total items                                             70%
B                      20% of total items                                             20%
C                     70% of total items                                             10%

Method # 2. V.E.D. Analysis:

This classification is applicable only for spare parts and is based on criticality. In
general, criticality of a spare part can be determined from the production downtime
loss, due to spare being not available when required. The VED analysis is done to
determine the criticality of an item and its effect on production and other services.

a. Vital (V):
A spare part will be termed vital, if on account of its non-availability there will be very
high loss due to production downtime and/or a very high cost will be involved if the
part is procured on emergency basis.

b. Essential (E):
A spare part will be considered essential if, due to its non availability, moderate loss
is incurred.

c. Desirable (D):
A spare part will be desirable if the production loss is not very significant due to its
non-availability. Most of the parts will fall under this category. The VED analysis helps
in focusing the attention of the management on vital items.

Method # 3. FSN Analysis:

FSN classification is based on frequency of issues/use. F, S and N stand for fast
moving, slow moving and non-moving items. This form of classification identifies the
items frequently issued; less frequently issued for use and the items which are not
issued for longer period, say, 2 years.

For instance, the items can be classified as follows:

a. Fast Moving (F):
Items that are frequently issued say more than once a month.

b. Slow Moving (S):

Items that are issued less than once a month.

c. Non-Moving (N):
Items that are not issued\used for more than 2 years.

Method # 4. SDE Analysis:

This classification is carried out based on the lead time required to procure the items.

The classification is as follows:

a. Scarce (S):
Items which are imported and those items which require more than 6 months’ lead
time.

b. Difficult (D):
Items which require more than a fortnight but less than 6 months’ lead time.

c. Easily Available (E):

Items which are easily available; mostly local items, i.e. less than a fortnights’ lead
time.

This classification helps in reducing the lead time required at least in case of vital
items. Ultimately, this will reduce stock-out costs in case of stock-outs.

Method # 5. HML Analysis:

The cost per item (per piece) is considered for this analysis. 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 these categories. High cost items (H), Medium Cost items (M) and Low
Cost item (L) help in bringing controls over consumption at the departmental level.

This classification is as follows:

a. High Cost items (H):
Items whose unit value is very high

b. Medium Cost items (M):

Items whose unit value is of medium value.

c. Low Cost items (L):

Items whose unit value is low.

This type of analysis helps in exercising control at the shop floor level i.e., at the use
point.
Method # 6. Just-In-Time Inventory System:
Just in Time (JIT) is a production and inventory control system in which materials are
purchased and units are produced only as needed to meet actual customer demand.
In just in time manufacturing system inventories are reduced to the minimum and in
some cases are zero.

JIT is a philosophy of continuous improvement in which non-value-adding activities

(or wastes) are identified and removed for the purposes of reducing cost, improving
quality, improving performance, improving delivery and adding flexibility.

JIT originated in Japan. Its introduction as a recognized technique/philosophy/ way of

working is generally associated with the Toyota motor company, JIT being initially
known as the “Toyota Production System”.
In today’s competitive world shorter product life cycles, customers rapid demands
and quickly changing business environment is putting lot of pressures on
manufacturers for quicker response and shorter cycle times. This can only be done by
Just in Time (JIT) philosophy. Under ideal conditions a company operating at JIT
manufacturing system would purchase only enough materials each day to meet that
day’s needs.

Moreover, the company would have no goods still in process at the end of the day,
and all goods completed during the day would have been shipped immediately to
customers. As this sequence suggests, “just-in-time” means that raw materials are
received just in time to go into production, manufacturing parts are completed just in
time to be assembled into products, and products are completed just in time to be
shipped to customers.
JIT applies primarily to repetitive manufacturing processes in which the same
products and components are produced over and over again. In JIT workers are
multifunctional and are required to perform different tasks. The just-in-time
inventory system focus is having the right material, at the right time, at the right
place, and in the exact amount.

Advantages of JIT:
The main benefits of JIT system are:
a. Funds that were tied up in inventories can be used elsewhere.

b. Areas previously used, to store inventories can be used for other more productive
uses.

c. The flows of goods from warehouse to shelves are improved.

d. Employees who possess multiple skills are utilized more efficiently.

e. Better consistency of scheduling and consistency of employee work hours.

f. Increased emphasis on supplier’s relationship.

g. Setup times are significantly reduced in the factory.

h. Defect rates are reduced, resulting in less waste and greater customer satisfaction.

ABC & VED ANALYSIS (MATRIX MODULE: CRITICALITY VS COST)

It is possible to conduct a two dimensional analysis taking into consideration cost on one
hand , i.e. A,B,C categories, and critically VED on the other. Findings of ABC and VED analysis
can be coupled and further grouping can be done to evolve a priority system of
management of stores:
Coupling matrix model
                                                Cat I                Cat II                           Cat III
                                                  V                      E                                   D
                        A                       Av                   Ae                                Ad
                        B                        Bv                    Be                               Bd
                        C                       Cv                    Ce                                Cd
 An example for the coupling matrix model for equipment between criticality and cost
  V E D

Defibrillator X-ray machine Air- curtains

H 1 2 3

Ventilator Electric cautery Ultrasonic wash machine

M 4 5 6

Oxygen regulator Patient trolley Electronic BP machine

L 7 8 9
  Cell 1 contains vital and high cost items like defibrillator. It must be noted that a
material manager has to comprehensively supervise category 1 items since an item may be
a low cost one but critical for patient care. ( oxygen regulator)
 Category I items: these items are the most important ones and require control by the
administrator himself.
 Category II items: these items are of intermediate importance and should be under
control of the officer in charge of the stores.
 Category III items: these items are of least importance which can be left under the
control of the store keeper.
 The grouping will essentially depend upon the strategy of management and the
environment of functioning. However these simple techniques can be effective in material
management system.
  Items with high criticality (V), but required in small quantity (A) should receive
highest priority. Items with low criticality (D) and which are required in big quantity should
receive least priority.
ABC Analysis Graph 
The two pyramids represent the ABC Analysis Graph.
 

The first pyramid suggests the percentage of the total number of inventory items. Here Category A
comprises only 10% of products, B contains 20% items, and C has the maximum number with 70%
of products.
 Similarly, if one perceives the second pyramid representing the percentage of average inventory
value, the structure reverses. Here, A gains the spotlight with almost 70% of inventory value and
revenue generation, while B retains its mid-level spot controlling 20% of inventory value. C only
generates 10% of revenue; hence it has limited control. 

In short, A signifies most important, B indicates moderately necessary, and C denotes least

essential inventory goods. 
How to Calculate ABC Analysis? 

A stock manager can perform ABC calculations on both individual product groups or a wide range of
inventory. An ABC Calculation is usually carried out within five steps, which are as follows-

1. First, multiply the annual number of products with each item's cost and find the utility of that
product.
2. Make a category of every product in the descending order based on its usage value. 
3. Add the usage value of the products, including the total number of items. 
4. Find out the cumulative percentages of items sold and annual consumption value. 
5. Now, it's time to divide your data into three categories, finally, in an approximate ratio of
80:15:5. 

Example of ABC Analysis 

ABC calculation has been further illustrated through an example containing a few tables. 

One can take the example of a Furniture Store.

Step 1: Multiply the total number of items by the cost of each unit to find the annual usage value. 
Step 2: After noting all the products of the inventory, it’s time to list them in the descending order
based on annual consumption value. 

Step 3: Sum up and add the total number of units sold and the annual consumption value. 
Step 4: Find out the cumulative percentage of products sold along with the percentage of annual
consumption value. 

Step 5: In the last step, split the data and numbers into the three A, B, and C categories. Remember,
it’s essential to set the data in the ratio of 80:15:5. 
The table shows that items listed in Category A generate approximately  79% of annual consumption
value, B yields 13%, while C generates 8% revenue.