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Selective Inventory Control is an essential part of Materials Management. Selective control is emphasizes on variations in methods of control from item to item based on selective basis. We can not apply uniform control since it’s expensive and gives diffused effect. For this purpose we can use some criterion such as lead time, consumption, criticality, cost of the items, procurement difficulties etc. The following classification can be used for selective treatment of various types of materials.

Classification of Inventory Control

No. Classification Full Form Criterion Employed
1 ABC Analysis Always Better Control Usage Value (i.e. Consumption per period x price per unit)
2 VED Analysis Vital Essential Desirable Loss of Production or Criticality of the item
3 HML Analysis High Medium Low Unit Price i.e. does not take consumption into account
4 SDE Analysis Scarce Difficult Easy Procurement Difficulties
5 GOLF Analysis Government Ordinary Local Foreign Source of procurement
6 SOS Anaysis Seasonal Off Seasonal Seasonality
7 FSN Analysis Fast Slow Non Moving Issues from stores
8 XYZ Analysis Inventory Investment

ABC Analysis

Based on very important principle: ” Vital Few: Trivial many”

Type Account for (Quantity) Account for (Expenditure)
A Items 5-10% 70-75%
B Items 10-20% 10-20%
C Items 70-80% 5-10%

 Figure 1

 

ABC-Analysis

A Items

Quantity: Hardly 5-10% of the total items

Expenditure: 70-75% of the total money spent on the materials

Control: Require Maximum, detailed and rigid control

Control by top executives

Procurement: Need to be procured frequently, the quantity per occasion being small.

Need to be stocked in smaller quantities

The inventory can be kept at minimum by frequent ordering

Supply: Contract with the manufacturers (More than one supplier) to supply in staggered lots according to production programme of the buyer

Require Value Analysis

B Items

Quantity: Generally 10-20% of the total items

Expenditure: Represent 10-20% of the total expenditure on the materials

Intermediate items

Control: Require Minimum control,need not be as detailed and as rigid as applied to A items

Supply: More items from same supplier, Bulk Orders

C Items

Quantity: Numerous: 70-80% of the total items

Inexpensive: hardly 5-10% of the total annual expenditure on materials

Insignificant Items: do not require close control

Procurement policy: exactly the reverse of A items

Procurement: infrequently and in sufficient quantities

Price discounts and reduced work load for buyer

Chart: ABC Analysis

Item A Item B Item C
Quantity 10% 20% 70%
Expenditure 70% 20% 10%
Control Maximum Medium Low
Supply Many Suppliers or manufacturer Single or Few Supplier Single Supplier

2. VED Analysis

Classification of items based on their criticality

Initial Stands For Description
V Vital Those items for want of which production would come to stop
E Essential items whose stockouts cost is very high
D Desirable items which do not cause any immediate loss of production orstockouts entail nominal expenditure  & cause minor disruptions

An item may be vital due to following reasons

– Non availability of item may cause serious production losses

– Procurement lead time is very high

– It’s non standard item and is procured to buyer’s design

– Single source of suppy and located far off from buyers location

Steps for VED analysis

1 Identification of factors essential for VED analysis lead time, nature of the item, source of supply
2 Assign points or weightage to the factors as per the importance may be 30,30,20 & 20 points
3 Divide each factor into 3 degrees & allocate points to each degree First degree is allocated points equal to the weightage of its factor, second degree – twice the weightage and third degree – thrice the weightage
4 Prepare categorization plan provides basis V E D
5 Evaluate items one by one against each factor & assign points
6 Place the items into V, E & D categories depending  on points scored by them & basis of classification

Applications

Best suited for spares inventory

Also can combine with other method e.g. ABC analysis and VED analysis

3. HML Analysis

Price criteria is used

Categorized into three groups

H: High

M: Medium

L: Low

Management will decide the cut off lines

For Example:

All items of unit price above Rs. 10000: H Category

Unit price between Rs. 1000 to Rs. 10000: M Category

Unit Price below Rs 1000: L Category

Use/ Applications of HML Analysis

1 To assess storage & Security Requirements High priced items in cupboards e.g. bearings, worm wheels
2 To keep control over consumption at the departmental head level Authority to indents of High & Medium priced items to departmental head after careful scrutiny
3 To determine the frequency of stock verification checking frequency: more for high priced items and less for L category
4 To evolve buying policies to control purchases Excess supply: Not accepted in case of H & M category, Acceptable in case of L category
5 To delegate authorities to different buyers to make petty cash purchase H & M by senior & L by junior buyers

Reference Books

Materials & Logistics Management, by L C Jhamb, Himalaya Publications

Materials Management, Procedures, Text and Cases, A K Datta, 2nd Edition, PHI

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