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ABC analysis and other

inventory models

Presented By
Anurag Bhardwaj (07320)
Mayank Sharma (07321)
• If some critical inventories
are not detained, there
could be an administrative
delay.
• On the other hand,
detaining inventories for a
prompt availability can
entail, in case of expensive
and rarely used parts, high
inventory holding costs.

• Our aim is to find the right


compromise between the
two which is more
economic.
Inventory management 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
– XYZ analysis
– VED analysis
– FSN analysis
Classification of inventories
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

XYZ Value of the items in To review the inventories and their


storage uses at scheduled intervals

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

SDE (Scarce, difficult, Problems faced in Lead time analysis and purchasing
easy to obtain) procurement analysis

SOS (seasonal, off Nature of supplies Procurement/holding strategies for


seasonal) seasonal items
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 10% of items
have 70% of the annual inventory consumption,

• 20% of the items have 20% of annual inventory consumption.

• 70% of the items have only 10% of the annual inventory


consumption.
• Since 70% of the annual consumption of inventory is covered by
only 10% of the items in the inventory, these items deserve
highest attention and are classified as ‘A’ items.

• Similarly 20% of the items covering 20 % of the inventory


investment are B class items
• Balance 70% of the inventory items are termed as C class items.
Methodology
The steps in computing ABC analysis are:
a Determine the annual usage in units for each item for the past
one-year.
b. Multiply the annual usage quantity with the average unit price of
each item to calculate the annual usage for each item.
c. Item with highest capital usage annually is ranked first. Then the
next lower annual usage item is listed till the lowest item is
listed in the last.
d. Table 1 shows ranks of the items according to the annual usage
for 10 items.
e. Arrange the items in the inventory by cumulative annual usage
and by cumulative percentage. Categorize the items in A, B , and
C categories.
Determination of rank by annual usage
Items Average Usage Unit cost (Rs) Annual Usage (Rs) Rank
(Units)
1 17 2.5

2 50 17

3 15 15

4 25 17

5 5 17

6 50 119

7 153 5

8 20 2.125

9 16 2.656

10 17 2.5
Determination of rank by annual usage
Items Average Usage Unit cost (Rs) Annual Usage (Rs) Rank
(Units)
1 17 2.5 42.5

2 50 17 850

3 15 15 225

4 25 17 425

5 5 17 85

6 50 119 5950

7 153 5 765

8 20 2.125 42.5

9 16 2.656 42.5

10 17 2.5 42.5
Determination of rank by annual usage
Items Average Usage Unit cost (Rs) Annual Usage (Rs) Rank
(Units)
1 17 2.5 42.5 8

2 50 17 850 2

3 15 15 225 5

4 25 17 425 4

5 5 17 85 6

6 50 119 5950 1

7 153 5 765 3

8 20 2.125 42.5 7

9 16 2.656 42.5 9

10 17 2.5 42.5 10
Categorizing items in ABC ranking
Item # Annual Cumulative Annual usage Category
usage (in rs.) annual usage % assigned
(Rs.)
6 5950 5950 70 A
2 850 6800 80 B
7 765 7565 89 B
4 425 7990 94 C
3 225 8245 97 C
5 85 8330 98 C
8 42.5 8372.5 98.5 C
1 42.5 8415 99 C
10 42.5 8457 99.5 C
9 42.5 8500 100 C
Total 8500
HML analysis

• This classification is based on unit value of an item.


• Further classified as high, medium and low valued 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.
XYZ analysis
• It is based on the value of inventory stored.
• X items are with high and Z are those whose inventory
stock are low.
• Y are those which have moderate inventory stocks.
• Helps identifying items for which huge amount is locked up
in stock and hence can be reduced.
• XYZ can be combined with ABC analysis as given below
Class of A B C
items
X Efforts to be made to Efforts to be made for Steps to be taken for
reduce stocks to Z reducing upto Y disposing surplus
stocks
Y Efforts to convert into Z - Control may be
category further tightened
Z - Stocks level may be -
reviewed twice a year
VED analysis

• Popularly known as Vital, essential and desired analysis for


the control of spare parts.
• Vital items have extreme criticality, desirable items are not
critical and desirable items lie in between.
• Non availability of ‘vital’ spare parts even for short period
leads to stoppage of production and ‘stock out’ costs are
high.
• Ensuring availability of such vital parts.
FSN analysis

• 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.
SDE analysis

• Done on the basis of problem faced in the


procurement of the items.
• Three letters stand for Scarce, difficult and easy to
obtain.
• Adopted by purchase department to determine the
method of buying and to fix the responsibilities of the
buyer.

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