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Selective Control of Inventory

Pareto's Law
The law of the vital few and the trivial many
Pareto Law from: Vilfredo Pareto, 1848-1923

Italian economist, based his law on observation of income distribution and noting that a small percentage of any population account for the vast majority of the income. 20% of people owned/responsible for 80% of wealth.

Selective Control of Inventory

ABC analysis SDE analysis (Scarce-Difficult-Easy) VED analysis (Vital-Essential-Desirable) XYZ analysis FSN analysis (Fast-Slow-Non-moving) S-OS analysis (Seasonal-Off-seasonal) GOLFanalysis(Govt.-Ordinary-Local-Foreign)

Criterion employed
Usage Value Procurement Difficulties Criticality of the Item Inventory investment Issues from stores Seasonality

Source of Procurement

ABC analysis
Popularly known as the "80/20" rule ABC concept is applied to inventory management as a rule-of-thumb. It says that about 80% of the Rupee value, consumption wise, of an inventory remains in about 20% of the items. Note : consumption value = (Qty consumed X unit rate) . 10-20% of the items ('A' class) account for 70-80% of the consumption. Next 15-25% ('B' class) account for 10-20% of the consumption. The balance 65-75% ('C' class) account for 5-10% of the consumption.

Steps in Making an ABC Analysis

1. Determine the annual usage for each item. 2. Calculate the AUV of each item. 3. List the items according to their AUV (descending order). 4. Calculate the cumulative AUV and the cumulative percentage of items.

5. Examine the annual usage distribution and group the items into A, B, C based on percentage of AUV.

An example:
A small firm inventories only ten items, but decide to setup an ABC inventory system with 20 % A items, 30 % B items, and 50 % C items. The company records provide the information shown below.


SDE analysis
SDE :A System of inventory classification based on ease of availability of items - Scarce, Difficult, Easy.

Scarceclassification comprises of items which are in short supply or imported.

Forward buying is applied. Generally Senior buyers are given responsibility.

SDE analysis
Difficult classification includes those items which are available indigenously but are not easy to procure.
Supplier of each item require several months of advance notice.

Easy classification covers those items which are readily available.

Scheduled buying or Contract buying is applied. Generally junior buyers are given responsibility.

VED analysis
VED analysis is done to determine the criticality of an item and its effect on production and other services. 'V' stands for vital :Items for want of which production will come to halt. - An item which usage wise may be of C Category, can be a
vital item.

VED analysis
'E' stands for essential : Items stock-out cost is very high.

'D' for desirable : Items which do not cause any immediate loss in production or their stock out entails nominal expenditures, and cause minor disruption for short duration.

XYZ analysis
XYZ analysis is based on value of stock on hand. Stock Value = (qty in stock X cost of item) X class items represent 70% of the stock value (although they may account for 20% number wise). Y class items represent 20% of the annual stock value. Z class items represent 10% of the annual stock value.

FSN analysis
By doing FSN analysis materials can be classified based on their movement from inventory for a specified period. Items are classified based on consumption and average stay in the inventory. F - Fast Moving S - Slow Moving N - Non moving Non-moving items must be periodically reviewed to prevent expiry & obsolescence

S-OS analysis
S-OS analysis is based on seasonality of items and it classifies the items in to two groups S(seasonal) and OS (off seasonal). Seasonal : Available only for a limited period Available throughout the year Non Seasonal( off seasonal) :
Quantity is decided on different consideration.

GOLF analysis
GOLF analysis help you to do material analysis based on location and type of organization. G -Government suppliers - long lead time - Payment in advance or against delivery
O- Ordinary or non government suppliers -Moderate lead time -availability for credit (30-60 days)

GOLF analysis
L - Local suppliers - Cash purchased. F - Foreign suppliers - Involve lot of administrative & procedural work - Requires making arrangement for shipping & post clearance, etc.