Important methods of inventory control include

A – B – C analysis
Periodic revision of classification
VED analysis

A – B – C analysis
 A – B – C analysis is a basic technique of materials management.
 The applicability of this technique extends over almost all aspects
of materials management such as purchasing, receiving and
inspection of materials.
 This technique can be used in any aspects of business or
individual problem to control the cost.
 
 The origin of ABC analysis is PARETO’S 80 – 20
rule.
 This rule says that 80 % of country’s economy is
controlled by 20% of the people.
 If we apply this rule to verify its correctness, the
results say that it is correct.
Example:
 List out all the expenses we do over a period of time
and arrange them in the order from highest to lowest.
Find the total of expenses and workout percentage of
each with respect to the total. We see that only 20 %
of items consume 80% of our expenses.
 We have 24 hours in a day. List out the times you have
spent on each activity and arrange them in descending
order, workout the percentage, we find 20% of items
covers 80% of time.
 The principle of management by exception is a better
term under which we can classify ABC analysis.
 Controls applied selectively to contribute to a better
management, in most cases avoiding wastages of
precious management time and, importantly avoiding the
confusion resulting from excessive controls.
 The degree and characteristics of controls to be
exercised by the management should depend
upon:

 The necessity of control,

 The relative necessity of the material to be placed
under control,
 The particular characteristics of the material.
 Materials may be divided into three categories or
three classes for selective management control.
 More grades than this may not give fruitful results.
These three grades in which materials are classified
is known as A – class materials, B – class materials,
C – class materials.
 In reality A, B, C stands for three different classes.
But many a time this classification is known as
Always Best Control.
 ABC analysis is based on the relative importance of
materials. Therefore there are various bases for ABC
classification. They are:
 Material price
 Material’s credibility
 Availability status of materials
 Materials physical characteristics such as size and weight,
 Frequency of materials usage, etc
 
 Depending on the situation and importance of above
characteristics, classification is made.
 Conventionally, however, the basis for ABC analysis is ‘Annual
consumption value’ of the material.
 One should understand clearly, that annual consumption value
does not refer to the unit price of the material and it refers to the
annual consumption value.
 Consider the firm using a component whose unit cost is
Rs. 1000/- . It uses three units in a year. Hence the annual
consumption value is Rs. 3000/-.
 Consider another item the firm is using is a bolt, whose
unit price is Re. 1/-. The quantity used in a year is 10,000
units. Hence the annual consumption value is Rs.
10,000/-.
 Here the bolt is considered to be high consumption value
item. It has been found in many industries that a small
number of items account for a large proportion of the
annual turnover of the inventory.
 These items should attract materials managers’ attention
immediately. Such items are known as ‘A’ class items.
 It is also observed in industries that a very large number of items
of inventory accounts for a small portion of the annual turnover or
annual consumption value of the materials.
 There are many items contributing very little to the ultimate
problem of managing the working capital investment.
 Naturally, materials manager should turn his attention to those
items only after he has taken care of high annual turnover items
(A class items).
 Such items are classified as ‘C’ class items. Class B items belong
to in-between categories; neither their total consumption value
high nor their total numbers is high.
 List all the materials used in the company
 Work out their annual consumption value
 Arrange all of the items in the descending order of their
annual consumption value
 Add all consumption costs and get the total annual
inventory cost
 Write the cumulative consumption value and find the
percentage of this cumulated consumption value to total
inventory value
 Write a was line at 70% and 90%
 All the items which fall under 70% are ‘A’ class items ,
items that falls between 70% and 90% are ‘B’ class items
and other, which are between 90% and 100% are ‘C’ class
items
The following steps are involved in implementing the ABC analysis:
 
 1. Classify the items of inventories, determining the expected use in
units and the price per unit for each item.
 
 2. Determine the total value of each item by multiplying the expected
units by its units price
 
 3. Rank the items in accordance with the total value, giving first rank to
the item with highest total value and so on.
 
 4. Compute the ratios (percentage) of number of units of each item to
total units of all items and the ratio of total value of each item to total
value of all items.
 
 5. Combine items on the basis of their relative value to form three
categories: -A, B and C.
 In addition to the intrinsic or market value of
materials, which is invested in the materials, there is
sometimes a nuisance value to the materials.
 In ABC analysis, we have seen that annual
consumption value; quantity of materials consumed
and unit cost plays a vital role.
 This is to say that ABC analysis deals with the
annual consumption value of the item due to their
presence and not any other aspect such as the
criticality of the material or the nuisance value.
 The nuisance Value is the cost associated with
materials due to their absence. Some of the materials
are important by their absence.
 In case they are not available, the whole production
system may come to standstill and involve high cost
of loss of production.
 The investment in these materials may be small but
for non – availability of the item the costs or losses
the company going to involve will be very high.
These are critical items, which are required in
adequate quantity.
 The materials may be classified depending upon
their criticality that is on functional basis.
 The degree of criticality can be stated as whether the
material is vital to the process of production, or
essential to the process of production or desirable for
the process of production.
 This classification is known as VED analysis, V
stands for vital, E stands for essential and D stands
for desirable items.
 In addition to the conventional ABC analysis,
VED analysis also plays an important role in
materials management.
 VED ranking may be done on the basis of the
shortage costs of materials, which can be either
quantified or qualitatively expressed.
 We can combine both and classify the materials
depending on both the consumption value and the
criticality; it will give us a fruitful result. This
can be done in nine ways
 V E D

A AV AE AD

B BV BE BD

C CV CE CD
 V E D

A 90% 80% 70%

B 95% 85% 75%

C 99% 90% 80%

 This type of classification helps the management to
decide the materials policy and what the service
levels are expected to see that no difficulty is faced.
 An item belongs to both A and V class is costlier, at
the same time higher criticality, the management
should see that it is available at any time the need
arises and the stock levels to be controlled properly
to see that inventory carrying cost are kepy under
control.
 Productions & operations management – P.Rama
murthy
page number 282-288
 Productions & operations management – R.
Pannerselvam
page number 223- 228
 http://en.wikipedia.org/wiki/ABC_analysis
“THANK YOU”