Selecting Control of Inventory

Managing inventory for a large number and variety of items it

require a mechanism for monitoring inventory on-hand, establishing a
reorder point, order quantity etc.
All items are not equal importance to the firm.
Care to those items whose value is high
Exercise the proper degree of control various type of items held in
inventory is to classify them onto groups.

Example: Ashok Leyland may have a inventory of about 60,000

items in their stores.
Categorization of items and have variable levels of control on the
different category
 ABC Classification

The ABC analysis consist of separating the inventory into

three groups: A, B, C. The unit cost or total cost of items
consumed could be one basic on which items could be
classified. The ABC classification of inventories is based on
the cost (or value) of items consumed.

Very high value items are A-class items and may be control
very tightly. Medium value items are categorized B-class
and low value items as C- Class.
Item Unit Annual Consumption Cumulative no Cumulative
No value Consumption Value of Items value (%)
1 30,000 80 2,400,000 5.00 62.96
2 450 1,200 540,000 10.00 77.12
3 590 400 236,000 15.00 83.32
4 25,000 9 225,000 20.00 89.22
5 600 200 120,000 25.00 92.37
6 4,500 15 67,500 30.00 94.14
7 400 100 40,000 35.00 95.19
8 30 1,000 30,000 40.00 95.97
9 145 200 29,000 45.00 96.73
10 2,300 12 27,600 50.00 97.46
11 9 1,500 13,500 55.00 97.81
12 11 1,000 11,000 60.00 98.10
13 2,000 5 10,000 65.00 98.36
14 4 4,000 16,000 70.00 98.78
15 120 120 14,400 75.00 99.16
16 20 500 10,000 80.00 99.42
17 10 1,000 10,000 85.00 99.69
18 80 100 8,000 90.00 99.90
19 25 100 2,500 95.00 99.96
20 1 1,500 1,500 100.00 100.00

3,812,000
100.00
90.00
80.00
70.00
60.00
50.00
40.00 Linear ()

30.00
20.00
10.00
0.00

Class AClass B Class C

From the table and the graph, 5-10 per cent of the items contributes
to 70-80 per cent of the value and classified as A class. These items
are required greater control and close monitoring. The middle portion
of about 10-25 per cent by value 20-30 per cent by the number of
items are in B class. These items require a moderate level of control.
About 60-70 per cent of items about 5-10 per cent of value are in
C class items. Simple level base ordering.

Other Classification Schemes:

XYZ : High unit cost( X-class); medium unit cost (Y class items);
Low unit cost ( Z class item)
XYZ classification is based on the unit cost, where as ABC classification is
into account of consumption pattern.

VED Classification: Vital, essential, Desirable

The classification is relevant in the case of maintenance items.
Example: Oil seals are used in hydraulic system. It may not be expensive
but vital.