1.

ABC Analysis
ABC analysis is the classification, analysis and management of all items in the inventory
based on its Value of its Annual Consumption, which is called Inventory Cost of the item.

Inventory cost = Unit rate x Annual consumption.

Steps for ABC Analysis

1. Calculate Inventory cost of all items.

2. List all items in the descending order of inventory cost with serial numbers. i.e. The
item with highest annual inventory cost is the first item

3. Calculate the cumulative inventory cost of each item

4. Calculate the % of cumulative cost of each item.

5. Calculate the percentage of each item in the whole inventory ie. the serial number of
each item / Total no. of items.

6. A graph is plotted with % of items in X axis and % of Cumulative Inventory cost on

Y axis.

Annual %
% of Total Inventory Cumulative Cumulative
Sl.No Nos cost cost cost Class
1 5 380000 380000 38 A
2 10 320000 700000 70 A
3 15 90000 790000 79 B
4 20 50000 840000 84 B
5 25 40000 880000 88 B
6 30 20000 900000 90 B
7 35 15000 915000 91.5 C
8 40 11000 926000 92.6 C
9 45 10000 936000 93.6 C
10 50 9000 945000 94.5 C
11 55 9000 954000 95.4 C
12 60 8000 962000 96.2 C
13 65 8000 970000 97 C
14 70 7000 977000 97.7 C
15 75 7000 984000 98.4 C
16 80 5000 989000 98.9 C
17 85 5000 994000 99.4 C
18 90 3000 997000 99.7 C
19 95 2000 999000 99.9 C
20 100 1000 1000000 100 C
 100 %
90 %
of Total Inventory Cost
ABC analysis will show that
a) 10 % of the items will constitute about 70 % of the total value of inventory. These
items are classified as A-class items.

b) Next 20 % of the items will constitute about 20 % of the total value. These items
are classified as B-class items.

70 %
c) Balance 70 % of the items will constitute balance 10 % of the total value. These are
classified as C-class items.

Methods of Inventory Control for ABC items

A-class items:
They are high value items but few in numbers up to about 10 % of total numbers

It will constitute about 70 % of the value of the total inventory cost.

These items require close monitoring.

Over stocking of these items will increase the inventory cost and the working capital
requirement.

P System (Fixed period inventory system) of inventory control is followed for A class items

Period of review is weekly or monthly.

Management review of present consumption rate, stock position, future requirement, re-order
quantity, re-order value and take decisions.

A
Possibility of Re-negotiation of prices, longer credit period and staggered delivery schedule
etc with the supplier are explored to reduce the inventory cost.

Alternate, reliable and competitive sources are also be explored for these items as part of the
inventory cost reduction strategy.

B-class items:
They constitute about 20 % of the total value and total numbers.

They lie between A-class and C-class items. These items require moderate monitoring and
control.

Q System or Perpetual Inventory model is used to control B Class items

EOQ and ROL is determined for each item.

The repeat order is usually placed for EOQ when the stock level comes down to a pre-
determined Re-Order Level (ROL).

These items are monitored bi-monthly or quarterly by the management and decisions are
taken on EOQ and ROL.

C-class items:
Balance 70 % of the items, constituting about 10 % of the total value, are classified as C-class
items.

These items are ordered usually once in a year and stocked for the whole year.

The physical stock verification and auditing of these items are done at the end of each year
before placing next year order.

ABC Analysis and inventory control is used by most of the manufacturing based industries.

2. VED Analysis
Process based industries like refineries, petrochemicals, fertilizer, cement etc, have a large
volume of spare parts in their inventory.

These are required for maintenance purposes of several equipments and systems.

VED analysis is mostly used for controlling the spare parts stock and inventory cost.

All spare parts are classified as

V – Vital spare parts: parts that can stop the plant and not readily available in the
market.

E – Essential spare parts: parts that can be procured and replaced in a short span of
time.
 D – Desirable spare parts: parts that are readily available in the market.

With out VED system, companies tend to stock more unnecessary, readily available items
leading to huge spare parts inventory.

At the same time Vital items may not be available in stock due to various reasons, resulting in
stoppage of plant.

Hence most process industries use VED inventory analysis and control.

Very large refineries and petrochemical complexes, whose spare parts inventory exceed
several hundred crores of rupees, follow a system of further sub classification of VED items
to VA,VB,VC; EA,EB.EC and DA,DB.DC, by combining VED and ABC analysis,
depending upon the cost of inventory to achieve cost effectiveness in spare parts inventory
management.

Methods of Inventory Control of VED items

V- Items are monitored by top management every month and purchase decisions are taken.

E - Items are monitored in 3 or 4 months

D Item – monitored, verified and ordered once in a year

3. FSN Analysis
This is an analysis of Fast, Slow and Non-moving items in the stock, depending upon its
consumption record.

This system is useful for traders, super markets, retailers, distributors etc who stock, display
and sell several items from several companies.

Consumption record and consumption rate of all items are recorded and analyzed to
categorize them as Fast moving, Slow moving or Non-moving item.

Methods of Inventory control of FSN items

F Item: Stock levels of Fast moving items are closely monitored and sufficient quantities are
stocked to avoid stock out.

S Items: Slow moving items are analyzed in detail to find the reason for its slow demand. It
may be due to display deficiency, product quality, product features, price etc. Try to
overcome these deficiencies where ever possible to make them fast moving and monitor its
movement. If the movement is still low, replace them by another fast moving product.

N Items: Non-moving items are mainly due to damage, product obsolesce, etc. Dispose off all
non-moving stock immediately and replace them by another fast moving product.

Batch production based manufacturing companies use a combination of ABC and FSN
analysis to manage their inventory more effectively. It will help them to identify N-Items i.e.
Obsolete, Surplus and Scrap (OSS) items. By their prompt identification and disposal,
company can efficiently utilize expensive stores space, as well as generate more profit from
their disposal.

4. HML Analysis
HML analysis take only unit value of each inventory into consideration. The annual
consumption is not considered because consumption is almost constant

Mostly used to control non-production inventory in factories, service facilities and offices

All items are listed in the descending order of unit value.

Management can decide the limiting values of each category

e.g.
Unit value >= Rs 10000.00 are H items
Rs 2000 to Rs 9999 – M items
< 1999 are L items

Inventory control
H items – monitored by HOD every month
M- items – monitored in 3 months
L items – verified and monitored once in a year

5. SDE Analysis
This analysis is based on the material availability and procurement problems of raw materials
and parts required for production.

S – Scarce materials, mostly imported raw materials and parts.

D – Difficult to get indigenous materials with uncertainty in supply
E – Easily available raw materials and parts

SDE analysis is not used for physical control of materials like other analysis, but used to
formulate Purchasing Strategies so that production can continue uninterrupted.

6. JIT Inventory Control

Companies engaged in mass production use Just In Time (JIT) inventory control.

This is a zero-stock system. No item is stocked in the company, bringing the carrying cost to
almost zero.

In this system, all the materials and parts are made available for production and assembly as
and when they are required, i.e. just in time when they are needed. These items need not be
stocked.

Thus JIT will reduce inventory cost to the minimum.

Reliability of suppliers for quality, quantity and delivery is very important for JIT inventory
management.

JIT is extensively used by automobile industries, FMCG manufacturers, consumer durable

manufacturers etc.
Suppliers are encouraged to have their own Warehouses near the factory or have a
manufacturing facility in near by location so that there is no delay due to transportation
constraints.

7. MRP 1 System
Several companies adopt computer based Material Requirement Planning (MRP 1) system to
manage their materials and control their inventory.

Standard and customized MRP Software packages are available for use.

MRP system is essentially an integration of planning, procurement, storage, consumption and

production activities to ensure that right material and parts are available at the right time, at
the right place and at the right cost.

By this system, manual data generation is eliminated, increasing reliability of information for
decision- making and control.

Built in checks and balances can be incorporated into the computer software program, to
ensure that every thing goes as per plan.

MRP system is flexible. It will facilitate quick implementation of changes in the production
and procurement plans to meet market fluctuations.

8. ERP System
Several large companies implement Enterprise Resource Planning (ERP) systems as a part of
their Business Process Re-Engineering (BPR) exercise.

MRP 1 system is a part of the total ERP package.

It aims at integrating inventory management with all other sub-systems of the enterprise like
marketing, production, finance, HRM etc, in order to optimize operations.

It is a fully integrated system for all activities of the entire enterprise.

Low cost ERP packages are now available for small and medium enterprises (SMEs), so that
they can also reap the benefit of ERP system

ERP Systems are also available as SaaS (Software as a Service) and in Cloud computing
platform for SMEs further reducing their cost of ERP implementation

9. SCM System
Supply Chain Management (SCM) system is an ‘end to end’ management system from raw
materials to the consumer.

EPR generally take care of internal operations of the company to make it highly productive.
SCM is part of a broad ERP package with special attention to supply and delivery side of
operations of the firm to reduce the total end to end cost to enhance competitiveness of the
firm

On the supply side it has several suppliers of raw materials and parts and supplied through a
logistics and transportation system.

On delivery side, the products once again goes through transportation system, logistics and
warehouses until it reaches distributors, retailers and ultimately its customers.

SCM system integrates all these components of the supply chain in the most efficient manner
to reduce inventory level and the ‘supply chain cost’ to the minimum possible.

Traditionally manufacturing companies aim at having a large number of vendors.

On the contrary, SCM system also aims to develop and manage a limited number of vendors
for the supply, who are dedicated, reliable and competitive.

These sources stay with the company for much longer periods.

They also take active part in product improvement and development activities of the parent
company through design collaboration

It is extensively used by retailing business and mass production industries.