Topic for the class: Inventory Classification

Unit _IV : Inventory

Date & Time : 17/11/2020 11.00 am

V V K Lakshmi
Asst Professor
Mechanical Engg Dept
GIT

EME477 : INVText book: Starr M K & Miller D W, Inventory Control

Theory and Practice, Prentice-HallENTORY CONTROL
 Learning Objectives

• Classification of inventory
 INVENTORY
• Selective Inventory Control is defined as a
process of classifying items into different
categories, thereby directing appropriate
attention to the materials in the context of
company’s viability.
 RISK OF HOLDING INVENTORY
• Price decline

• Product Deterioration

• Product Obsolescence
TOOLS &
TECHNIQUES OF INVENTORY
MANAGEMENT/ CONTROL
• ABC Analysis
• Economic Ordering Quantity (EOQ)
• Order Point Problem
• Two Bin Technique
• VED Classification
• HML Classification
• SDE Classification
• FSN Classification
• Order Cycling System
• Just In Time (JIT)
Classification of
Materials for
Inventory Control

Classification Criteria
A-B-C Annual value of consumption of the items
V-E-D Critical nature of the components with
respect to products.
H-M-L Unit price of material
F-S-N Issue from stores
S-D-E Purchasing problems in regard to
availability
S-O-S Seasonality
G-O-L-F Channel for procuring the material
X-Y-Z Inventory value of items stored
Classify Materials for
inventory control

High
A
Annual
$ value
of items
B

C
Low

Few Many
Number of Items
 ABC Analysis
CATEGORY NO. OF ITEMS(%) ITEM VALUE(%) MANAGEMENT
CONTROL

A 15 70 (HIGHEST) MAXIMUM

B 30 20(MODERATE) MODERATE

C 55 10(LEAST) MINIMUM

TOTAL 100 100

 A,B,C
• A-items : 15% of the items are of the highest
value and their inventory accounts for 70% of
the total.
• B-items : 20% of the items are of the
intermediate value and their inventory
accounts for 20% of the total.
• C-items : 65%(remaining) of the items are
lowest value and their inventory accounts for
the relatively small balance, i.e., 10%.
 Order Point Problem
• The re-order point is that level of inventory when a fresh
order should be placed with suppliers. It is that inventory
level which is equal to the consumption during the lead
time or procurement time.
• Re-order level = (Daily usage × Lead time) + Safety stock.
• Minimum level = Re-order level – (Normal usage × Average
delivery time).
• Maximum level = Reorder level – (Minimum usage ×
Maximum delivery time) + Re-order quantity.
• Average stock level = Minimum level + (Re-order
quantity)/2.
• Danger level = (Average consumption per day × Lead time
in days for emergency purchases).
 Two Bin Technique
• Control of Category ‘C’ inventories
• Two Bins/Groups
First Bin- just enough to last from the date a
new order is placed until it is received
for inventory.
Second Bin- enough to meet current demand
over the period of replenishment.
 VED Classification
• Specifically used for Classification of SPARE PARTS
V-E-D Classification
 V- part is VITAL( high stock level)

 E- part is ESSENTIAL (moderate stock level )

 D- part is DESIRABLE (minimum stock level )

 VED Classification
• Based on the critical nature of items.

• Applicable to spare parts of equipment, as

they do not follow a predictable demand
pattern.

• Very important in hospital pharmacy.

 VED Classification
• V-Vital : Items without which the
activities will come to a halt.
• E-Essential : Items which are likely to
cause disruption of the
normal activity.
• D-Desirable : In the absence of which the
hospital work does not get
hampered.
 HML Classification
• Material classified on the basis of UNIT VALUE

 H- HIGH VALUE
 M- MEDIUM VALUE
 L – LOW VALUE
• Based on the unit value (in rupees) of items.
• Similar to A-B-C analysis
 HML
• 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.
• • The HML analysis is useful for keeping
control over consumption at departmental
levels, for deciding the frequency of physical
verification, and for controlling purchases.
 FSN Classification
• Inventory is classified based on the
MOVEMENT OF INVENTORIES from stores
• Inventory technique used to AVOID
OBSOLESCENCE
 F- Fast moving
 S- Slow moving
 N- Non moving
 FSN
• Takes into account the distribution and
handling patterns of items from stores.
• Important when obsolescence is to be
controlled.
F – Fast moving
S – Slow moving
N – Non moving
 SDE
• S-D-E Classification
• Based on the lead-time analysis and
availability.
S – Scarce : longer lead time
D – Difficult : long lead time
E – Easy : reasonable lead time
 S-O-S Classification
• S-O-S :Seasonal- Off- Seasonal
• Some items are seasonal in nature and hence
require special purchasing and stocking
strategies.
• EOQ formula cannot be applied in these cases.
• Inventories at the time of procurement will be
extremely high.
 X-Y-Z Classification
• Based on the value of inventory stored.

• If the values are high, special efforts should be

made to reduce them.

• This exercise can be done once a year.