expenses related to excess inventory, stockouts, and wasteful procurement and

storage by managing inventory more effectively. This enhances profitability and

lowers the possibility of financial losses.
In conclusion, inventory classification is crucial for any firm because it aids in
cost-effective inventory management, more customer satisfaction, lower costs, and
increased profitability.

Inventory classification types/techniques

Each company has its own set of requirements and objectives, and it is up to them
to determine which method of inventory classification will best serve them.
Businesses may better optimise inventory levels, lower expenses, and fulfil
consumer demand with accurate classification of stock on hand. There are several
types of inventory classification, including:

ABC Analysis: This classification method categorizes items based on their level of
importance or value to the business. Items are divided into three categories: A, B,
and C, with A items being the most important and C items being the least important.
XYZ Analysis: This method categorizes inventory items based on their demand
variability. Items are classified into three categories: X, Y, and Z, with X items
having the most variable demand and Z items having the least variable demand.
FSN Analysis: This classification method categorizes items based on their
consumption rate. Items are divided into three categories: Fast-moving (F), Slow-
moving (S), and Non-moving (N).
HML Analysis: This method categorizes items based on their unit price. Items are
classified into three categories: High-value (H), Medium-value (M), and Low-value
(L).
VED Analysis: This classification method categorizes items based on their
criticality in the production or service process. Items are divided into three
categories: Vital, Essential, and Desirable.
SDE Analysis: This classification method categorizes items based on their
availability and lead time. Items are divided into three categories: Scarce,
Difficult, and Easy.
WXYZ Analysis: This method categorizes inventory items based on their profit
potential. Items are classified into four categories: W (winners), X (promising), Y
(questionable), and Z (losers).
Advantages:
Inventory classification can help organisations in transition manage their
inventory levels and optimise their operations. Inventory classification benefits:

Managing supply chain disruptions: The COVID-19 epidemic has disrupted global
supply systems, making it hard for businesses to get their supplies. ABC analysis
can help firms prioritise key purchases and reduce supply chain disruptions.
Optimizing e-commerce operations: As online shopping grows, firms must properly
manage inventory and delivery times. XYZ analysis can help firms identify
commodities with the greatest changeable demand and improve inventory levels for
rapid and dependable delivery.
Managing cash flow: Businesses must manage cash flow, and excessive inventory can
tie up resources. HML research helps organisations identify high-value items and
better manage inventory, freeing up cash flow for other requirements.
Customer satisfaction: E-commerce and omnichannel retail have raised customer
expectations for speedy, reliable delivery. FSN analysis can help organisations
identify the items with the greatest consumption rates and guarantee they have
enough stock to meet client demand.
Optimizing operations: Businesses can optimise operations by classifying inventory.
VED and SDE analysis can assist firms identify key items and manage inventory
levels, respectively.
With clearly labelled stock that a company may prioritise, rather than considering
everything the same, proper inventory classification makes accounting for inventory
much less of a headache. Better reports, which in turn lead to more informed
business decisions, are possible with the proper answer to the problems that arise
in inventory accounting. And with less time spent investigating inventory
accounting puzzles, companies will have more bandwidth to focus on expanding your
enterprise.