TOPIC:ABC ANALYSIS &VED ANALYSIS

NAME: ROLL NO.

SUMIT

CHAUDHARI S-202.

SAURABH

NAIR S-222.

SUBJECT: PRODUCTION & MATERIALS MANAGEMENT..

ACKNOWLEDGEMENT

we owe a great thanks to many people who helped and supported us during this project.

Our deepest thanks to lecturer, naresh sukhani the guide of the project for guiding and correcting various documents of us with attention and care. He has taken pain to go through the project and and make necessary connection as when needed.

I would also thank my institution without whom this project would have been a distant reality. I also extend my heartfelt thanks to my family and well-wishers.

Inventory Control Methods Basically there are two methods in inventory control:

ABC Analysis. VED Analysis.

ABC ANALYSIS

The ABC analysis is a business term used to define an inventory categorization technique often used in materials management. It is also known as Selective Inventory Control.

It stands for Always Better Control. Policies based on ABC analysis:

A ITEMS: very tight control and accurate records. B ITEMS: LESS TIGHTLY CONTROLLED and good records . C ITEMS: simplest controls possible and minimal records

The ABC analysis provides a mechanism for identifying items that will have a significant impact on overall inventory cost, while also providing a mechanism for identifying different categories of stock that will require different management and controls.

The ABC analysis suggests that inventories of an organization are not of equal value. Thus, the inventory is grouped into three categories (A, B, and C) in order of their estimated importance.

'A' items are very important for an organization. Because of the high value of these ‘A’ items, frequent value analysis is required. In addition to that, an organization needs to choose an appropriate order pattern (e.g. ‘Just- in- time’) to avoid excess capacity.

'B' items are important, but of course less important, than ‘A’ items and more important than ‘C’ items. Therefore ‘B’ items are intergroup items.

'C' items are marginally important. 

Definition

An analysis of a range of items that have different levels of significance and should be handled or controlled differently.

It is a form of Pareto analysis in which the item (such

activities, customers, documents, inventory items, sales territories) are grouped into three categories (A, B, and C) in order of their estimated importance. 'A' items are very important, 'B' items are important, 'C' items are marginally important.

For example, the best customers who yield highest revenue are given the 'A' rating, are usually serviced by the sales manager, and receive most attention. 'B' and 'C' customers warrant progressively less attention and are serviced accordingly.

Policies   for ‘A’ group   items 1. They should be ordered more frequently to reduce

capital lock up at a time in inventories as 15 percent of items cost65 percent of total value.

2. The purchasing department should make the maximum efforts to expedite and delivery of these items are to be stored as few in number as possible.

3. The purchase of these items should be with top officials to ensure prompt services from the supplier.

4. The stock report of ‘A’ items should be sentmore frequently, say at least once in 15 days.

Policies   for ‘B’   group   items These account for 20 percent of total quantity and 20percent of

the total value. Order quantities, re-order stocks and safety stock should be fixed and

revised for ‘B’ items at least one in every 4 to 6 months. B items should be ordered less frequently than A items.

Policies   for ‘C’ group   items C group of items account for 65 percent of quantity and hardly 15

percent of value. Large quantities can be brought at a time, as total investment will be

least. Paper work can be reduced considerably if orders are placed

once or twice a year. The source of supply can be one or two based on their reliability

Pareto la w:

In any series of elements to be controlled, only a small fraction in terms of elements will usually account for a large fraction in terms of results.”

It is also known as the 80/20 rule. Pareto law states that “the vital few and trivial many” which applies to many areas of inventory control. In inventory management, usually 20% of the items contribute 80% of the annual consumption value or value of materials held in stores at any given time.

The primary objective of inventory control is to reduce costs, so 80/20 rule is useful as it states that we have to focus on 20% of the total items used, or which are kept as inventory so that there is no effect on the 80% of the total consumption value or value of inventory which is held in stores. It means that 20% of the items are vital few and the balances 80% are trivial many.

PROCEDURE FOR ABC ANALYSIS:

. Create the ABC compile: The ABC compile ranks all the items in your inventory based upon criteria you select. This ranking is used to assign classes to your items.

 Generate the ABC Descending Value report: This step may have been performed as part of step 2, however you may run the report at a later time.

 Define class names: Use your own terminology to determine what are commonly used as ABC classes.  Define class names that suit your business environment. 

Define an ABC assignment group.:

Create a group name.Assign the compile to the group.

Associate classes with the assignment group. Choose classes to use with the assignment group. Assign ranking to the classes within an assignment group.

Assign items to the classes. Assignment may be made based upon the following criteria:

o Sequence numbero Items Percento Inventory Valueo Value Percent

Update ABC assignment groups.

. Execute ABC Assignments Report.

The ABC Assignments Report will display all items and the classes of the items. 

Review report for errors.If there are errors in class assignments, goto task #8.  Otherwise, end of activity.

ADVANTAGES OF ABC ANALYSIS. The ABC inventory control method determines the importance of

inventory items based on usage, sales or costs criteria. This inventory control method provides companies the ability to give individual stock keeping units (SKUs) different levels of inventory control based on the SKUs relative importance. Companies perform a Pareto analysis to determine ABC item classifications. The ABC inventory method offers advantages over non-classification methods in the areas of cost-control, SKU level management and order fulfillment.

Control:

Utilizing the ABC inventory method gives a company more control over the inventory it stores. A company that uses annual costs of goods sold (COGS) as its basis for the ABC classification method stocks less of the "A" class items (identified as having higher annual COGS) and stocks more of the "B" and C" class items (identified as having lower annual COGS). On the other hand, a company that uses annual usage as its basis for classification stocks more of the "A" class items because of their higher usage and less of the lower use "C" class items. Stocking a better mix of the right inventory allows a company to control over-supply and under-supply of important SKUs.

Costs:

Because the ABC inventory method makes use of Pareto's law (the basic 80/20 rule), companies can focus on containing the cost of the 20% of items that make up 80% of a companies annual spend. Once a company has determined which items fall into each ABC category it can establish cost-reduction initiatives at the SKU level.

These initiatives can include reducing the SKU's lead-time, reducing safety-stock levels and negotiating reduced pricing with suppliers. Additionally, even without implementing cost-savings initiatives a company experiences cost-reductions from eliminating excess stock for less important, but sometimes-costly SKUs.

Improved service :

One of the greatest benefits comes from the improvement in customer service levels and order fulfillment. ABC analysis provides a company with information to stock the right-mix of inventory. If a company uses customer demand as its basis for analysis, it ends up stocking a better mix of the items customers require. When a company has the right inventory at the right time it reduces backorders and unfilled orders. This has a positive impact on customer service and gives a competitive advantage to the company that uses this methodology.

Warehouse:

ABC inventory extends to warehouse management has well. Companies utilizing ABC analysis in the warehouse give priority space to faster moving SKUs. This allows workers to rapidly find, pick and pack fast moving items. Implementing ABC inventory management in the warehouse reduces labor cost and increases productivity.

DISADVANTAGES OF ABC ANALYSIS

Standardization and codification:Proper standardization and codification of inventory items needed.

Considers money value of items:Considers only money value of items & neglects the importance of items for production process or assembly or functioning.

Assumes that price remains the same.Price of an item is assumed to be same throughout the year. In practice it is unlikely to be so.

Ved analysis

VED Analysis means....Vital, Essential and Desirable Analysis... It is the Analysis for monitoring and control of stores and spares inventory by classifying them into 3 categories viz., Vital, Essential and Desirable. The mechanics of VED analysis are similar to those of ABC Analysis.

VED Classification

While in ABC, classification inventories are classified on the basis of their consumption value and in HML analysis the unit value is the basis, criticality of inventories is the basis for vital, essential and desirable categorization.

The VED analysis is done to determine the criticality of an item and its effect on production and other services. It is specially used for classification of spare parts. If a part is vital it is given ‘V’ classification, if it is essential, then it is given ‘E’ classification and if it is not so essential, the part is given ‘D’ classification. For ‘V’ items, a large stock of inventory is generally maintained, while for ‘D’ items, minimum stock is enough. 

V-Vital

• The vital spare parts are those which can cause stoppage of the plant, if they are not available at the right time.

• Usually such spare parts are known as Capital or Insurance spares. • The inventory policy is to keep at least one number of the vital

spare irrespective of its value. E-Essential

• Essential spare parts are those whose non availability may not adversely affect production.

• Such spare parts may be available from many sources within the country and the procurement lead time may not be long. Hence a low inventory of essential parts is held D-Desirable

• The Desirable spare parts are those which, if not available, can be manufactured by the maintenance department or may be procured from local suppliers and hence no stock is held usually.