Below are the type of Inventory analysis , which are carried out for classifying materials so that materials and processes can be treated differently based on the classes of materials.
ABC analysis classifies the materials based on their consumption during a particular time period( usually one year). Depending upon the company to company A B & C items can be as under
A – Approx 5% to 10% of the Items accounting for 60% to 80% of the consumption value
B – Approx 10 % to 30% of the Items accounting for 10% to 30% of the consumption value
C –Approx 60% to 85% of the Items accounting for 5% to 15% of the consumption value
Usage of ABC Analysis
1. In day to day warehouse operations, materials are some time under issued, over issued, issued and not accounted into the system, misplaced, stolen etc. This results into inaccuracy in the inventory. Cycle counting is the process to count and reconcile the materials. Ideally, every material in the warehouse should be counted during a fixed interval (every year) for maintaining 100% accuracy, but counting & reconciling every material is not cost effective and very expensive. To count the accuracy of the inventory in a cost effective manner, it is recommended to count the materials based on inventory classification. If A class materials are counted within a fixed interval (could be six months or a year) then you need to count only 5% to 10% of the total materials and it will cover 60% to 80% of the inventory value. That means that you only count 5 % to 10% of the materials and remove the inaccuracy from the inventory value from 60% to 80%. Similarly B class materials can also be counted on a less frequency ( from once in 18 months to 24 Months) as the nos of materials become higher and C class materials at even lesser frequency(Once in 27 months to 36 months) as nos of material becomes more (60% to 85% of the total materials).
2 . An inventory controller shall be concentrating more on the A class items for reducing the inventory as he/she shall be concentrating only 5% to 10% of the total items and shall be getting the opportunity to reduce inventory on 60% to 80% of the value.
3. Any reduction in lead time of A class items shall result in reduction in inventory, so procurement manager will workout with suppliers to reduce the lead time.
4. On issue of materials, Tight control on A class, Moderate control on B class, Loose Control on C class. So A class items may be issued after getting the approvals from Senior Executives of the company. B may be moderately controlled . Very little control can be exercised while issuing C class item
Important Note: An A class item need not necessarily be a fast moving item. Alternatively C class may or may not be a fast moving item. ABC analysis is purely based on the dollar value of consumption.
XYZ analysis is calculated by dividing an item's current stock value by the total stock value of the stores. The items are first sorted on descending order of their current stock value. The values are then accumulated till values reach say 60% of the total stock value. These items are grouped as 'X'. Similarly, other items are grouped as 'Y' and 'Z' items based on their accumulated value reaching another 30% & 10% respectively. The XYZ analysis gives, you an immediate view of which items are expensive to hold. Through this analysis, you can reduce your money locked up by keeping as little as possible of these expensive items.
Seasonal, Off Seasonal Report helps you to view seasonal required items.
S- For seasonal Materials
OS - For non-seasonal Materials
Purchase planning has to be done if the material is seasonal as material shall be available for a particular time period of the year.
Seasonal Items can be further classified into two groups
1. Leechee is seasonal fruit which is available only for one month in year. If any Juice and pulp company wants to buy this fruit then the procurement department shall have to plan in advance the requirement and procurement job becomes concentrated only for one month. Other than this issue, shelf life and storage is also a big problem as the plan is consume is throughout the year while the buying time available is only one month.
2. Some materials are seasonal but are available throughout the year such as grains, and other non perishable items. These items are bought during season and these items are cheaply available during season. The company can take the advantage of economies of scale in buying these materials in bulk. But at the same time the inventory carrying cost should not go beyond the profit margins while holding the large inventory
Non-seasonal materials are available throughout the year without any significant price variation.
Non seasonal items can be Plastics, Metals etc. The prices of these materials are independent of the season.
This analysis is done for classifying the materials based on their prices
H -High Price Materials
M-Medium Price Material
L – Low price materials
Procurement department is more concerned with prices of materials so this analysis helps them to take them the decisions such as, who will procure what based on the hierarchy and price of material .
Some of the other objective can be as under
Helps in taking the decision such as whether to procure in exact requirement or opt for EOQ or purchase only when needed
When it is desired to evolve purchasing policies then also HML analysis is carried out i.e. whether to purchase in exact quantities as required or to purchase in EOQ or purchase only when absolutely necessary
When the objective is to keep control over consumption at the department level then authorization to draw materials from the stores will be given to senior staff for H item, next lower level in seniority for M class item and junior level staff for L class items
Cycle counting can also be planned based on HML analysis. H class items shall be counted very frequently, M class shall be counted at lesser frequency and L class shall be counted at least frequency as compared to H & M class
SDE Analysis :
S-Scarce Material i.e. hardly available
D-Difficult material i.e. difficult in sourcing.
E-Easy materials i.e. materials available easily
SDE analysis is done based on purchasing problems associated with items on day-to-day basis. Some of the purchasing problems are as under: -
Long Lead Times.
Scarcity and hardly available
Sourcing the same material from many geographically scattered sources
Uncertain and unreliable sources of supply
Purchasing department classifies these materials and formulates the strategy and policy of procurement of these items accordingly. So classification of materials is done based on level of difficulty in sourcing
S Class Materials
These materials are always in shortage and difficult in procurement. These materials sometimes require government approvals, procurement through government agencies. Normally one has to make the payment in advance for sourcing these materials. Purchase policies are very liberal for such materials
D Class Materials:
These materials though not easy to procure but are available at a longer lead times and source of supply may be very far from the consumption. Procurement of these materials requires planning and scheduling in advance. Particular OEM spares of the machinery may fall under this category as that OEM may be very far from the ordering or consumption location.
E Class Materials
These materials are normally standard items and easily available in the market and can be purchased anytime.
Government, Ordinary, Local, and Foreign Report help you to do material analysis based on location and type of organization.
G -Government suppliers
O- Ordinary or non government suppliers
L - Local suppliers
F - Foreign suppliers
Classification of materials based on movement i.e. Fast Moving Slow Moving and Non Moving. Some times also called as FNS (Fast Moving, Normal Moving and slow moving).
Want to know how to do FSN analysis ? Click Here
VED Analysis :
By using this analysis for material we classify materials according to their criticality to the production i.e. how and to what extent the material M1 is going to effect the production if the material M1 is not available.
V class item is the item, if not issued, then the production stop shall result, Water, Power, Compressed Air are some the Vital class Items
Essential Class of items- If these items are not available then stockout cost is very high.
Desirable Class of items- If these items are not available then there is not going to be immediate production loss; stock out cost is very less.