HML Analysis

VED Analysis
SDE Analysis
EOQ
MUSIC-3D
 HML Analysis
 High, Low Medium (Price criterion)
 Cut off lines are fixed by management
 HML Analysis helps to
o Assess storage and security requirements
o To keep control over consumption at the
departmental head level
o Determine the frequency of stock verification
o To evolve buying policies to control purchases
o To delegate authorities to different buyers to
make petty cash purchases.
 VED Analysis
 Vital, Essential Desirable
 Based on criticality.
 Vital – production would come to halt.
 Essential – whose stock out cost is very high.
 Desirable – items which do not cause any
immediate loss of production
 It is advantageous to use more than one
method. E.g. ABC and VED analysis together.
 SDE Analysis
 Scare Difficult and Easy
 Based on problems of procurement:
o Non-availability
o Scarcity
o Longer lead time
o Geographical location of suppliers and
o Reliability of suppliers etc
 Scare: short in supply, imported or canalized
through government agencies.
o Best to procure once in a year in spite of effort
and expenditures involved in the procedure of
import.
 Difficult: available indigenously but not easy to
procure
EOQ (Economic Ordering Quantity)
Important assumptions
 Demand is known, constant, and independent
 Lead time is known and constant
 Receipt of inventory is instantaneous and
complete
 Quantity discounts are not possible
 Only variable costs are setup and holding
 Stock outs can be completely avoided
 If the quantity ordered is 500 units all 500
hundred arrive at one time
 Quantity jumps from 0 to 500 (Q)
 Demand is constant and hence inventory
drops at uniform rate
 Inventory Usage Over Time

Usage rate Average

Order inventory
quantity = Q
Inventory level

on hand
(maximum
Q
inventory
level) 2

Minimum
inventory

Time
 Minimizing Costs
Objective is to minimize total costs

Curve for total

cost of holding
and setup

Minimum
total cost
Annual cost

Holding cost
or Inventory
carrying cost
curve
Setup (or order)
cost curve
Optimal Order quantity
order
quantity
 The EOQ Model
Q = Number of pieces per order
EOQ= Optimal number of pieces per order (EOQ)
D = Annual demand in units for the Inventory item
S = Setup or ordering cost for each order
H = Holding or carrying cost per unit per year
Annual setup cost = (Number of orders placed per year)
x (Setup or order cost per order)

Annual demand Setup or order

=
Number of units in each order cost per order

D (S)
=
Q
Annual holding cost = (Average inventory level)
x (Holding cost per unit per year)

Order quantity
= (Holding cost per unit per year)
2

= Q ( H)
2
Optimal order quantity is found when annual setup cost
equals annual holding cost

D Q
S = H
Q 2
Solving for Q*
2DS = Q2H
Q2 = 2DS/H
EOQ = 2DS/H
 EOQ – ADVANTAGES

 OPTIMISED DECISION REGARDING QUANTITY

TO BE ORDERED & ORDERING FREQUENCY
 APPLICABLE TO SINGLE ITEM AS WELL AS
GROUP OF ITEMS WITH SIMILAR HOLDING AND
ORDERING COSTS
 TOTAL PROCUREMENT COST LOWER THAN
FOR ANY OTHER SYSTEM

EOQ – LIMITATIONS

 RESULTS MISLEADING IN CASE OF ERRATIC

USAGE, FAULTY BASIC INFORMATION
REGARDING ORDERING AND CARRYING COSTS
 COSTLY CALCULATIONS
 MUSIC-3d Rule
(Multi Unit Selective Inventory Control) - a three dimensional approach

 Major portion of effective managerial time is

spent on those materials which are most
important.
 This approach is based on:
- Cost (High/Low Annual Consumption Value-80/20 Rule: Top 20% of item,
accounting for about 80% of consumption values shall be deemed as high
consumption value and balance 80% of the items accounting for about 20%
of the consumption value shall be deemed as low consumption value item.)

- Criticality (Critical/Non-critical)
- Availability (Short/Long-lead Time)