selective control of inventory

8/3/2019 Selective Control of Inventory

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Selective Control ofInventory


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Pareto's Law

The law of thevital fewand thetrivial many

Pareto Law from:Vilfredo Pareto, 1848-1923

Italian economist,based his law onobservation of income distribution and noting that a smallpercentage of any population account for the vast majorityof the income. 20% of people owned/responsible for 80%of wealth.


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Selective Control of Inventory

Criterion employedClassification

Usage ValueABC analysisProcurement Difficulties

SDE analysis (Scarce-Difficult-Easy)

Criticality of the ItemVED analysis (Vital-Essential-Desirable)Inventory investmentXYZ analysisIssues from storesFSN analysis (Fast-Slow-Non-moving)SeasonalityS-OS analysis (Seasonal-Off-seasonal)

Source of ProcurementGOLFanalysis(Govt.-Ordinary-Local-Foreign)


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ABC analysis

Popularly known as the "80/20" rule ABC concept isapplied to inventory management as a rule-of-thumb. Itsays that about 80% of the Rupee value, consumptionwise, 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 theconsumption.

The balance 65-75% ('C' class) account for 5-10% of

the consumption.


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


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An example:

A small firm inventories only ten items, butdecide to setup an ABC inventory systemwith 20 % A items, 30 % B items, and 50 % Citems. The company records provide the

information shown below.


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Solution


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SDE analysis

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

Scarceclassification comprises of items whichare in short supply or imported.

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


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SDE analysis

Difficult classification includes those itemswhich are available indigenously but are noteasy 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.


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VED analysis

VED analysis is done to determine thecriticality of an item and its effect onproduction and other services.

'V' stands for vital :Items for want of whichproduction will come to halt.

- An item which usage wise may be of C Category, can be avital item.


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VED analysis

'E' stands for essential : Items stock-outcost is very high.

'D' for desirable : Items which do not causeany immediate loss in production or theirstock out entails nominal expenditures, and

cause minor disruption for short duration.


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XYZ analysis

XYZ analysis is based on value of stock onhand.

Stock Value = (qty in stock X cost of item) X class items represent 70% of the stock value

(although they may account for 20% numberwise).

Y class items represent 20% of the annual

stock value. Z class items represent 10% of the annual

stock value.


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FSN analysis

By doing FSN analysis materials can beclassified based on their movement frominventory for a specified period.

Items are classified based on consumptionand average stay in the inventory.F - Fast MovingS - Slow Moving

N - Non moving Non-moving items must be periodically

reviewed to prevent expiry &

obsolescence


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S-OS analysis

S-OS analysis is based on seasonality of itemsand it classifies the items in to two groupsS(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.


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GOLF analysis

GOLF analysis help you to do material analysisbased 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)


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GOLF analysis

L - Local suppliers- Cash purchased. F - Foreign suppliers

- Involve lot of administrative & procedural work- Requires making arrangement for shipping &post clearance, etc.

selective control of inventory

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