Classification of Inventory Items

Operations Management notes by Rahul Sir’s MBA/BBA Classes

FSN Analysis
Meaning of FSN Analysis

FSN Analysis is an inventory management technique that is based on the rate of consumption of
spares and goods in an organization. This analysis divides the inventory into three categories
based on their speed or rate of utilization, their consumption rate, and average stay. FSN stands
for Fast-moving, Slow-moving, and Non-moving.

Fast-moving inventory

Fast-moving inventory comprises inventory that moves in and out of stock fastest and most
often. Therefore these goods have the highest replenishment rate. Items in this category generally
comprise less than 20% of the total inventory.

Slow-moving inventory

Items in this category move slower, so their replenishment is also slower. This category
comprises around 35% of the total inventory in an organization.

Non-moving inventory

The last category of this analysis is the least moving portion of the inventory and also includes
the dead stock. Replenishment of such inventory may or may not occur after utilization. This
category can go as high as 55%-60% of the total inventory in organizations.

FSN Analysis and calculation

FSN analysis makes use of a few parameters to arrive at the three categories of goods in the
inventory. Since it is a scientific analysis and not based on the judgment of a few individuals,
formulas are used to arrive at figures which tell us if a good belongs to a fast-moving or slow-
moving, or non-moving category.

Average Stay: Number of cumulative days inventory is held/ (Opening Balance of the good +
Number of goods received during the period)

Consumption Rate: Total number of goods issued/ Total period

The next step is to calculate the Cumulative average stay and Cumulative consumption rate.

Cumulative average stay: Average stay of the item + Average stay of all goods having an
average stay more than itself

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 Classification of Inventory Items
Operations Management notes by Rahul Sir’s MBA/BBA Classes

Cumulative consumption rate: Consumption rate of the item + Consumption rate of all goods that
are consumed faster

Percentage average stay: (Cumulative average stay of the item/ Cumulative average stay of all
goods) x 100

Percentage consumption rate: (Cumulative consumption rate of the item/ Cumulative

consumption rate of all goods) x 100

Interpretation

As per Cumulative average stay, FSN analysis goods have three categories:

 Fast-moving goods comprise of 10% or lesser of the average cumulative stay calculated.
 Slow-moving goods comprise of 20% or lesser of the average cumulative stay calculated.
 Non-moving goods comprise of 70% or lesser of the average cumulative stay calculated.

Therefore as per the classification, fast-moving goods stay only 10% or lesser of the cumulative
average stay of the total inventory. In other words, they have the quickest movement time of all
the inventory.

As per the cumulative consumption rate, the three categories will be:

 Goods with a 70% or less consumption rate are fast-moving.

 Goods with 20% of the cumulative consumption rate are slow-moving.
 Items with 10% or lesser of the cumulative consumption rate are non-moving.

Therefore, again we see that as per the classification, goods that are consumed the quickest are
the fast-moving goods. Those with the lowest consumption rates are non-moving goods.

Both the parameters, i.e., the average stay of goods in the inventory and consumption rate of that product,
should be simultaneously calculated and used. It helps to arrive at accurate FSN analysis results, and
inventory management decisions can be effectively taken based on it.
Importance and Usage of FSN Analysis

FSN analysis helps the management to make informed and accurate inventory decisions. It helps
in the optimum utilization of scarce resources and guides the management to make the best use
of the money, time, and space available.

 It helps to identify the “deadstock.” The management needs to invest only as per the actual
stay and consumption of that product and not make extra purchases. Also, it can identify which
item is not moving at all and dispose of it at discounted rates.
 FSN analysis also helps in space management effectively. Slow-moving and non-moving
categories of goods can be bought only in limited quantities to avoid jamming of storage space.
Also, fast-moving goods can be stored at locations near to entry and exit points of godowns or
warehouses that have clear access all the time. It would help in saving time and labor.

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 Classification of Inventory Items
Operations Management notes by Rahul Sir’s MBA/BBA Classes

 This analysis can be an excellent buying guide in the case of seasonal products. The
management will have a clear picture of the time of the year when a product turns into a fast-
moving one from a slow or non-moving category. As a result, it can time its purchase
accordingly.

FSN analysis helps to effectively allocate monetary resources to items that are fast-moving and beneficial
for the organization. As a result, it helps to avoid blocking money in the slow-moving or non-moving
category of goods.

VED Analysis
Meaning of VED Analysis

VED analysis is an inventory management technique that classifies inventory based on its
functional importance. It categorizes stock under three heads based on its importance and
necessity for an organization for production or any of its other activities. VED analysis stands for
Vital, Essential, and Desirable.

V-Vital category

As the name suggests, the category “Vital” includes inventory, which is necessary for production
or any other process in an organization. The shortage of items under this category can severely
hamper or disrupt the proper functioning of operations. Hence, continuous checking, evaluation,
and replenishment happen for such stocks. If any of such inventories are unavailable, the entire
production chain may stop. Also, a missing essential component may be of need at the time of a
breakdown. Therefore, the order for such inventory should be beforehand. Proper checks should
be put in place by the management to ensure the continuous availability of items under the
“vital” category.

E- Essential category

The essential category includes inventory, which is next to being vital. These, too, are very
important for any organization because they may lead to a stoppage of production or hamper
some other process. But the loss due to their unavailability may be temporary, or it might be
possible to repair the stock item or part.

The management should also ensure optimum availability and maintenance of inventory under the
“Essential” category. The unavailability of inventory under this category should not cause any stoppage
or delays.
D- Desirable category

The desirable category of inventory is the least important among the three, and their
unavailability may result in minor stoppages in production or other processes. Moreover, the
easy replenishment of such shortages is possible in a short duration of time.

Importance of VED Analysis

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 Classification of Inventory Items
Operations Management notes by Rahul Sir’s MBA/BBA Classes

It is of utmost importance to any organization to maintain an optimum level of inventory.

Maintaining inventory has its costs, and hence, this analysis bifurcates inventory into three parts
to help in managerial decisions on inventory maintenance. There are four types of costs to
maintain stock which are:

Item cost

This is the cost or price of the inventory items. It is the actual purchase value of holding stock.
Therefore, it will be high with more inventory and vice-versa.

Ordering / Set-up Cost

The purchase of inventory involves certain costs. These may include transportation charges,
packing charges, etc.

Holding Costs

After the purchase of inventory items, there are a few costs too. These may be related to storage,
insurance charges of stock or inventory, labor costs associated with the handling of stock, etc.
Moreover, it includes any damage, leakage, or pilferage of the stock in hand.

Stock-Out Cost

These costs are the result of an inventory item running out of stock. It includes loss of production
due to a spare part getting out of stock. Moreover, this may delay the product sale. Also, the
product itself may get out of stock. Such losses are a part of the stockout cost.

VED analysis is a crucial tool for understanding and categorizing inventory according to its
importance. Because of it, the management can optimize costs by investing more in the vital and
essential categories of stock and lesser in the desirable category of inventory.

Stock-Out Cost

These costs are the result of an inventory item running out of stock. It includes loss of production
due to a spare part getting out of stock. Moreover, this may delay the product sale. Also, the
product itself may get out of stock. Such losses are a part of the stockout cost.

VED analysis is a crucial tool for understanding and categorizing inventory according to its
importance. Because of it, the management can optimize costs by investing more in the vital and
essential categories of stock and lesser in the desirable category of inventory.

Usage of VED Analysis

Small and big organizations both widely use VED analysis. The most important application of
this analysis is in maintaining medical inventory in hospitals and their drug stores. Drugs and
related supplies comprise a significant portion of a hospital’s budget. Moreover, maintaining the

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 Classification of Inventory Items
Operations Management notes by Rahul Sir’s MBA/BBA Classes

right quantity of the right drugs is an extremely challenging task for management. While a
shortage of critical medicine can lead to crises and even loss of lives, an abundance of non-
important medications can lead to blockage of money and space or both.

VED analysis helps divide medicines into three categories as per their usage and importance. Therefore,
medication in the vital group is to be kept in stock compulsorily, as they would be critical for patients.
Medicines that are a bit less risky or which can be obtained from other sources too at short notice become
part of an essential category. Those that are least critical and their shortage will not pose any danger to a
patient’s health and lives get their place in the desired class. As a result, the hospital’s management can
wisely allocate resources on medical inventory as per their respective VED categories.

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