Inventory Analysis

Session 3, Unit 3
Selective Control of Inventories
Alternative Classification Schemes

1. ABC Analysis (on the basis of consumption value)

2. XYZ Classification (on the basis of unit cost of the
item)
3. FSN Analysis (on the basis of movement of
inventory)
4. VED Classification (on the basis of criticality of
items)
5. On the basis of sources of supply
Significant Few PARETO’s
Insignificant Many Law
ABC Analysis
1. Based on the annual value of the item.
2. ABC – Always Better Control
3. Procedure:
 Calculate Unit Price and Annual Demand of the items
 Unit Price x Annual Demand = Annual Value
 List in the Ascending order of Annual Value
 Calculate the cumulative annual values

4. A Class – Monitor Closely, Continuous rigorous control

5. B Class – Monitor periodically, relaxed control
6. C Class – Rule of thumb
Sample Data for ABC Calculation
CUMULATIVE
UNIT VALUE ANNUAL CONSUMTION CUMULATIVE
ITEM NO. NUMBER OF
(Rs) DEMAND VALUE (Rs) VALUE (%)
ITEMS (%)
0 0.00%
1 30000 80 2400000 5.00% 62.96%
2 450 1200 540000 10.00% 77.12%
3 590 400 236000 15.00% 83.32%
4 25000 9 225000 20.00% 89.22%
5 600 200 120000 25.00% 92.37%
6 4500 15 67500 30.00% 94.14%
7 400 100 40000 35.00% 95.19%
8 30 1000 30000 40.00% 95.97%
9 145 200 29000 45.00% 96.73%
10 2300 12 27600 50.00% 97.46%
11 9 1500 13500 55.00% 97.81%
12 11 1000 11000 60.00% 98.10%
13 2000 5 10000 65.00% 98.36%
14 4 4000 16000 70.00% 98.78%
15 120 120 14400 75.00% 99.16%
16 20 500 10000 80.00% 99.42%
17 10 1000 10000 85.00% 99.69%
18 80 100 8000 90.00% 99.90%
19 25 100 2500 95.00% 99.96%
20 1 1500 1500 100.00% 100.00%
ABC Classification
A graphical illustration

100%

90%
Class C
80%
Class B
Consummption value (%)

70%

60%
Class A
50%

40%

30%

20%

10%

0%

0% 10
%
20
%
30
%
40
%
50
%
60
%
70
%
80
%
90
% 0%
10
No. of items (% )
XYZ Classification

On the basis of unit cost of the item

High Unit cost (X Class item)
Medium Unit cost (Y Class item)
Low unit cost (Z Class item)
VED Analysis
1. On the basis of criticality of items
Vital
Essential
Desirable

V – High level of service, safety stock

E – Medium level of service, low
safety stock
D – Low level of service
FSN Analysis
On the basis of movement of inventory
Fast Moving
Slow Moving
Non-moving
Selective Control of Inventories

N
2
S

F
1

V A B C
E
D
 Vendor Managed Inventory(VMI)
Vendor Managed Inventory (VMI) is a supply chain
agreement where Manufacturer/ supplier takes control of the
inventory management decisions for the seller or retailer. Or in
supply terms it means upstream agent is responsible for the
inventory of the downstream agent.

How VMI Can Be Applied Successfully?

Providing the customer data on sold items to the distributor &
then applying following steps:-
Upstream & Downstream agents to plan collaboratively.
Focus on quality forecasting, safety stocks, lead time, service
level & ownership issues.
Implement the VMI system together.
Continuously Review the VMI system & identify
Improvements.
 Merits & Demerits of Vendor Managed Inventory
Advantages (VMI)
Promotes ‘demand smoothing’ meaning production Vs
demand.

A VMI supplier can control downstream decisions that can help

transportation decisions.

VMI promotes long-term relationships

Disadvantages of VMIfor costs of switching
suppliers.
VMI programs are costly & thus can reduce working capital.

Implementation of VMI can go wrong due to the technological

capabilities of inventory tracking.

Dependence on one supplier that uses VMI can be costly if

performance degrades.
 Push, Pull and Push & Pull
Effects In Inventory Management.
 Push Effect in Inventory Mgt
1. Push System of Inventory Control involves forecasting inventory needs
to meet customer demand. Firm will in turn produce enough product
to meet forecast demand and sell, or push the goods to consumer.
2. Eg Materials Requirements Planning (MRP). MRP combines calculations
for financial, operations and logistics planning. It is a computer-based
information system which controls scheduling & ordering. Aim is to
make sure raw goods/materials needed for production are available
when they are needed.
3. Drawbacks of Push inventory control system are that forecasts are
often inaccurate as sales can be unpredictable & vary from one year to
next. Another problem is that if too much product is left in inventory, it
can increase company's costs for storage.

4. Advantage of push system is that company is fairly assured it will

have enough product on hand to complete customer orders, preventing
the inability to meet customer demand for the product.
 Pull Effect in Inventory Mgt
1. Pull Inventory Control System begins with a customer's order. With
this strategy, companies only make enough product to fulfill
customer's orders. One advantage to the system is that there will be
no excess of inventory that needs to be stored, thus reducing
inventory levels and the cost of carrying and storing goods.

2.Eg. Just in Time(JIT) Concept. Goal is to keep inventory levels to a

minimum by only having enough inventory, not more or less, to meet
customer demand. JIT system eliminates waste by reducing amount
of storage space needed for inventory and the costs of storing goods.

3.Major disadvantage of pull system is that it is likely that firm can

run into ordering dilemmas, such as a supplier not being able to get a
shipment on time. This leaves company unable to fulfill the order and
contributes to customer dissatisfaction.
 Push & Pull Effect in Inventory Mgt
1. It demands a more accurate forecast of sales and adjusts
inventory levels based upon actual sale of goods. The goal
is stabilization of the supply chain and the reduction of
product shortages which can cause customers to go
elsewhere to make their purchases.

2. Some companies have come up with a strategy they call

the push-pull inventory control system, which combines
the best of both the push and pull strategies. Push-pull is
also known as lean inventory strategy.

3. With the push-pull inventory control system, planners use

sophisticated systems to develop guidelines for addressing
short - and long-term production needs.
 Bullwhip Effect in SCM
1.Bullwhip Effect(also known as the Forrester effect) is
defined as the demand distortion that travels upstream in
supply chain from the retailer through to the wholesaler and
manufacturer due to the variance of orders which may be
larger than that of sales.
2. What Causes the Bullwhip effects ?
Demand forecast updating: Members of the supply chain
updating their demand forecasting
Order Batching: Members of supply chain rounding up or down
the Qty of orders(places order at different times).
Price fluctuations: Usually driven by discounting resulting in
larger quantities of purchases.(Promotions)
Rationing & Gaming: Buyers & sellers delivering more or less
w r. to. order quantities.
More the Number of layers, or more the delay or rate of change, the greater
the fluctuations
 How Bullwhip effect can be Reduced?
1. Bullwhip effect in the SCM can be Reduced through shared
knowledge with suppliers & Customers. If members of supply
chain can determine what information is causing over reactions,
this can be resolved. Communications & response times can be
improved using modern technology.

2. Bullwhip effect can also be mitigated by :-

Reduced lead times
Revision of reordering procedures.
Better forecasting methods using Point of Sale data, EDI,
Internet,
Limiting Price Fluctuations
Integration of planning and performance measurement.
Reduction in Fixed costs in ordering
 Service System Tour: Maruti Showroom in
Meerut 1 PPT(slide 7): Opened with link (12
minutes)

Right click on the URL below to open the hyperlink

in the web browser…

https://www.youtube.com/watch?v=CGnR6
wTHYxM