ABC analysis and other

inventory models

Case Study-4: Chemical

Company

Group-8
 Inventory Control Techniques
 Effective inventory management requires the understanding
and knowledge of the nature of inventories and for this
purpose, there are some models
 ABC analysis
 HML analysis
 SAP analysis
 VED analysis
 FSN analysis
 Classification of Inventory Control
Techniques
Technique Basis Main Use

ABC (always better Value of Conception To control raw materials,

control) components and WIP inventories in
the normal course of business
HML (high, medium, Unit price of the Mainly to control purchase
low) material

VED (Vital, essential, Criticality of the To determine the stocking level of

desirable) component spare parts

FSN (Fast moving, slow Consumption of pattern To control Obsolescence

moving, non moving) of the components

SAP (Scarce, Available, Problems faced in Lead time analysis and purchasing
Plenty to obtain) procurement analysis
 ABC Analysis
 One of the most important considerations of control is the value of annual
consumption of inventory items in a year.

 Only a small number of inventory items consume a very large share of

inventory consumption during the year.

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

inventory consumption.

 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.

Quantitative analysis
 It has been observed that in an industrial unit only 20% of items have 75% of the
annual inventory consumption,

 30% of the items have 15% of annual inventory consumption.

 50% of the items have only 10% of the annual inventory consumption.

 Since 75% of the annual consumption of inventory is covered by only 20% of the items
in the inventory, these items deserve highest attention and are classified as ‘A’ items.

 Similarly 30% of the items covering 15 % of the inventory investment are B class items

 Balance 50% of the inventory items are termed as C class items.

Example
Item Description Annual Consumption in Cost per unit (Rs)
units)
Hydrochloric Acid 4500 4 / litre
Benzene 650 9 / kg
Packing Drums 2000 15 per drum
Lac 55 10 / kg
Wax 4000 1 / kg
Ethylene 7000 5.75 / kg
Chlorine 2500 5.50 / kg
Methyl Alcohol 4000 11/litre
Denatured Spirit 75 12 / litre
Sodium Acetate 100 13 / kg
Castor Oil 100 35 / kg
Commercial Camphor 100 6 / kg
Commercial gum 25 5/kg
Amide 2500 1/kg
Corrugated cartons 50 10 / piece
Linseed Oil 100 90 / kg
Lemon grass 60 150 / kg
Commercial talcum powder 200 25/kg
Red oxide 900 5/kg
Xylene 1000 12/kg
Toluene 400 7/kg
Ethyl acetate 50 13/kg
Kerosene oil 100 20/litre
Petroleum jelly 100 25/kg
Coal tar 50 12/kg
Refined charcoal 150 35/kg
 Determination of rank by annual usage
Item Description Annual Consumption in Cost per unit (Rs) Annual Usage Rank
units)
Hydrochloric Acid 4500 4 18000 4
Benzene 650 9 5850 9
Packing Drums 2000 15 30000 3
Lac 55 10 550 24
Wax 4000 1 4000 13
Ethylene 7000 5.75 40250 2
Chlorine 2500 5.5 13750 5
Methyl Alcohol 4000 11 44000 1
Denatured Spirit 75 12 900 20
Sodium Acetate 100 13 1300 19
Castor Oil 100 35 3500 14
Commercial Camphor 100 6 600 22
Commercial gum 25 5 125 26
Amide 2500 1 2500 16
Corrugated cartons 50 10 500 25
Linseed Oil 100 90 9000 7
Lemon grass 60 150 9000 8
Commercial talcum powder 200 25 5000 11
Red oxide 900 5 4500 12
Xylene 1000 12 12000 6
Toluene 400 7 2800 15
Ethyl acetate 50 13 650 21
Kerosene oil 100 20 2000 18
Petroleum jelly 100 25 2500 17
Coal tar 50 12 600 23
Refined charcoal 150 35 5250 10
 Categorizing items in ABC ranking
Item Description Cumulative annual Category
Rank Annual usage %
usage (Rs.) assigned
1 Methyl Alcohol 44000 44000 20.07986309
2 Ethylene 40250 84250 38.44837422
3
4
5
Packing Drums
Hydrochloric Acid
Chlorine
30000
18000
13750
114250
132250
146000
52.13918996
60.35367941
66.62863662
A
6 Xylene 12000 158000 72.10496292
7 Linseed Oil 9000 167000 76.21220764
8 Lemon grass 9000 176000 80.31945237
9
10
11
Benzene
Refined charcoal
Commercial talcum powder
5850
5250
5000
181850
187100
192100
82.98916144
85.38505419
87.66685682
B
12 Red oxide 4500 196600 89.72047918
13 Wax 4000 200600 91.54592128
14 Castor Oil 3500 204100 93.14318311
15 Toluene 2800 206900 94.42099258
16 Amide 2500 209400 95.5618939
17 Petroleum jelly 2500 211900 96.70279521
18 Kerosene oil 2000 213900 97.61551626
19
20
21
Sodium Acetate
Denatured Spirit
Ethyl acetate
1300
900
650
215200
216100
216750
98.20878494
98.61950941
98.91614375
C
22 Commercial Camphor 600 217350 99.18996007
23 Coal tar 600 217950 99.46377638
24 Lac 550 218500 99.71477467
25 Corrugated cartons 500 219000 99.94295493
26 Commercial gum 125 219125 100
219125      
 Advantages
• Helps to exercise selective control
• Gives rewarding results quickly
• Helps to point out obsolete stocks easily.
• In case of “A” items careful attention can be
paid at every step such as estimate of
requirements, purchase, safety stock,
receipts, inspections, issues, etc. & close
control is maintained.
• In case of “C” items, recording & follow up,
etc. may be dispensed with or combined.
• Helps better planning of inventory control
• Provides sound basis for allocation of funds &
human resources.
Disadvantages
• It doesn’t take into account the criticality of
an item.
• Proper standardization & codification of
inventory items needed.
• Considers only money value of items &
neglects the importance of items for the
production process or assembly or
functioning.
• Periodic review becomes difficult if only ABC
analysis is recalled.
• When other important factors make it
obligatory to concentrate on “C” items more,
the purpose of ABC analysis is defeated.
 HML Analysis

The HML classification is similar to the ABC classification, except for the fact that
instead of consumption values of items, their units values are considered. Items
are classified on the basis of their unit value into:

H= High value items

M= Medium value items
L=Low value items
 Items are listed out in descending order of unit value and management
then decides the limits for determining 3 categories.
 Delegation of authorities is done for sanctioning of items according to
their values.
 Advantages

• Assess storage and security

requirements

• To keep control over consumption at

the departmental head level

• Determine the frequency of stock

verification

• To evolve buying policies to control

purchase

• To delegate authorities to different

buyers to make petty cash purchase
 Category
Item Description Annual Consumption in units) Cost per unit (Rs) Rank assigned
Lemon grass 60 150 1 H
Linseed Oil 100 90 2
Refined charcoal 150 35 3
Castor Oil 100 35 4
Commercial talcum powder 200 25 5
Petroleum jelly 100 25 6
Kerosene oil 100 20 7
Packing Drums 2000 15 8
Sodium Acetate 100 13 9 M
Ethyl acetate 50 13 10
Xylene 1000 12 11
Denatured Spirit 75 12 12
Coal tar 50 12 13
Methyl Alcohol 4000 11 14
Lac 55 10 15
Corrugated cartons 50 10 16
Benzene 650 9 17
Toluene 400 7 18
Commercial Camphor 100 6 19
Ethylene 7000 5.75 20
Chlorine 2500 5.5 21
Red oxide 900 5 22
L
Commercial gum 25 5 23
Hydrochloric Acid 4500 4 24
Wax 4000 1 25
Amide 2500 1 26
 VED Analysis
VED- vital, essential & desirable- analysis is used primarily for control of
spare parts. The spare parts can be divided into 3 categories-

Vital
Essential
Desirable

Classification of items based on critically. Critically means how a machine

is important to production. If the machine stops, how many machines
and workstations will come to a halt? In monetary terms, how much
loss to production occurs?
Vital: The spares, the stock-out of which even for a short
time will stop production for quite sometime are vital
spares.
Essential: The spares, the absence of which cannot be
tolerated for more than few hours or a day & which are
essential for the production to continue, are essential
spares.
Desired: The desirable spares are those spares which are
needed but their absence for even a week or so will not lead
to stoppage of production.
 FNS Analysis

FNSD analysis divides the items of stores into 4 categories in

the descending order of importance of their usage rate.

‘F’ stands for fast moving items that are consumed in a short
span of time.

‘N’ stands for normal moving items which are exhausted over a
period of a year or so.

‘S’ indicates slow moving items which are not issued at

frequent intervals & are expected to be exhausted over a
period.

‘D’ means dead items & the consumption of such items is

almost nil.
 Advantages
• Rate of movement of material in store and
consumption pattern forms the basis of
classification.

• Necessary to control obsolescence

• The demand for fast moving items is very

high, so there shouldn't be shortage of items.

• Slow moving items are with low turnovers so

these are not issued at frequent intervals.

• Items with nil consumption come under non

moving such as obsolete inventory.
 SAP Analysis
 Done on the basis of problem faced in the procurement of the items.

 Three letters stand for Scarce, Available and Plenty to obtain.

 Adopted by purchase department to determine the method of buying

and to fix the responsibilities of the buyer.
Thank You

Group-8
Shray Arora-8
Bakul Chowdhary -9
Karan Gomber-18
Payal Gosar-19
Jatin Goyal-20
Ankit Patel-48
Nitin Sarawagi-53