OPERATIONS MANAGEMENT

ABC/VED/FSN
ANALYSIS OF INVENTORY CONTROL
UNIT 3

By-:
Er. Vaibhav Agarwal
Asst. Prof.
SOM, BBDU
Lucknow 1
 ABC ANALYSIS - 1
• One of the most important considerations of
control is the value of annual consumption of
inventory items in a year.
• Only a small number of inventory items consume
a very large share of inventory consumption
during the year.
• A little larger number of inventory items covers a
moderate share of annual inventory
consumption.
• A very large number of items just cover a very
small share of annual inventory consumption.
• These facts gave birth to the concept of ABC
analysis. 2
 ABC ANALYSIS - 2
• It has been observed that in an industrial unit only
10% of items have 70% of the annual inventory
consumption,
• 20% of the items have 20% of annual inventory
consumption, and
• 70% of the items have only 10% of the annual
inventory consumption.
• Since 70% of the annual consumption of inventory is
covered by only 10% of the items in the inventory,
these items deserve highest attention and are
classified as ‘A’ items.
• Similarly 20% of the items covering 20 % of the
inventory investment are B class items
• Balance 70% of the inventory items are termed as C
class items. 3
 STEPS IN ABC ANALYSIS
The steps in computing ABC analysis are:
a Determine the annual usage in units for each item
for the past one-year.
b. Multiply the annual usage quantity with the average
unit price of each item to calculate the annual usage
in US$ for each item.
c. Item with highest dollar usage annually is ranked
first. Then the next lower annual usage item is listed
till the lowest item is listed in the last.
d. Table 1 shows ranks of the items according to the
annual usage in US$. for 10 items.
e. Arrange the items in the inventory by cumulative
annual usage (dollars) and by cumulative
percentage. Categorize the items in A, B , and C
categories. 4
 TABLE 1: DETERMINATION OF
RANKS BY ANNUAL USAGE IN US$
Item Average usage Unit cost Annual usage Rank
# (units) (US$) (US$)
1 17 2.5
2 50 17
3 15 15
4 25 17
5 5 17
6 50 119
7 153 5
8 20 2.125
9 16 2.656
10 17 2.5
5
 TABLE 1: DETERMINATION OF
RANKS BY ANNUAL USAGE IN US$
Item Average usage Unit cost Annual usage Rank
# (units) (US$) (US$)
1 17 2.5 42.5
2 50 17 850
3 15 15 225
4 25 17 425
5 5 17 85
6 50 119 5950
7 153 5 765
8 20 2.125 42.5
9 16 2.656 42.5
10 17 2.5 42.5
6
 TABLE 1: DETERMINATION OF
RANKS BY ANNUAL USAGE IN US$
Item Average usage Unit cost Annual usage Rank
# (units) (US$) (US$)
1 17 2.5 42.5 8
2 50 17 850 2
3 15 15 225 5
4 25 17 425 4
5 5 17 85 6
6 50 119 5950 1
7 153 5 765 3
8 20 2.125 42.5 7
9 16 2.656 42.5 9
10 17 2.5 42.5 10
7
 TABLE 2:CATEGORIZING THE
ITEMS IN ABC RANKING
Item Annual Cumulative annual Annual Category
# usage (US$) usage (US$) usage % assigned
6 5950 5950
2 850 6800
7 765 7565
4 425 7990
3 225 8245
5 85 8330
8 42.5 8372.5
1 42.5 8415
10 42.5 8457.5
9 42.5 8500
8
Total 8500
 TABLE 2:CATEGORIZING THE
ITEMS IN ABC RANKING
Item Annual Cumulative annual Annual Category
# usage (US$) usage (US$) usage % assigned
6 5950 5950 70
2 850 6800 80
7 765 7565 89
4 425 7990 94
3 225 8245 97
5 85 8330 98
8 42.5 8372.5 98.5
1 42.5 8415 99
10 42.5 8457.5 99.5
9 42.5 8500 100
9
Total 8500
 TABLE 2:CATEGORIZING THE
ITEMS IN ABC RANKING
Item Annual Cumulative annual Annual Category
# usage (US$) usage (US$) usage % assigned
6 5950 5950 70 A
2 850 6800 80 B
7 765 7565 89 B
4 425 7990 94 C
3 225 8245 97 C
5 85 8330 98 C
8 42.5 8372.5 98.5 C
1 42.5 8415 99 C
10 42.5 8457.5 99.5 C
9 42.5 8500 100 C
10
Total 8500
 TABLE 3: ABC CATEGORY -
SUMMARY
category Item# % of items in $ in the % $ in the
inventory category category

A 6 10 5950 70

B 2, 7 20 1615 19

C 1, 3, 4,5,8,9,10 70 935 11

Total 10 100 8500 100

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 Inventory control

It means stocking adequate number and

kind of stores, so that the materials are
available whenever required and wherever
required. Scientific inventory control results
in optimal balance
Functions of inventory control

•To provide maximum supply service,

consistent with maximum efficiency &
optimum investment.

•To provide cushion between forecasted &

actual demand for a material
 Economic order of quantity
EOQ = Average Monthly Consumption X Lead Time [in
months] + Buffer Stock – Stock on hand

ECONOMIC ORDER OF
QUANTITY(EOQ)

PURCHASING CARRYING
COST COST
•Re-order level: stock level at which fresh
order is placed.
•Average consumption per day x lead time +
buffer stock
•Lead time: Duration time between placing
an order & receipt of material
•Ideal – 2 to 6 weeks.
 ABC ANALYSIS
(ABC = Always Better Control)
This is based on cost criteria.
It helps to exercise selective control when confronted
with large number of items it rationalizes the number of
orders, number of items & reduce the inventory.
About 10 % of materials consume 70 % of resources
About 20 % of materials consume 20 % of resources
About 70 % of materials consume 10 % of resources
 ‘A’ ITEMS
Small in number, but consume large amount
of resources
Must have:
•Tight control
•Rigid estimate of requirements
•Strict & closer watch
•Low safety stocks
•Managed by top management
 ‘B’ ITEM
Intermediate
Must have:
•Moderate control
•Purchase based on rigid requirements
•Reasonably strict watch & control
•Moderate safety stocks
•Managed by middle level management
 ‘C’ ITEMS
Larger in number, but consume lesser amount of
resources
Must have:
•Ordinary control measures
•Purchase based on usage estimates
•High safety stocks
ABC analysis does not stress on items those are
less costly but may be vital
 ANNUAL COST CUMMULATIVE
ITEM % ITEM
[Rs.] COST [Rs.]
COST %
ABC
1 90000 90000
10 % 70 %
A 2 50000 140000
3 20000 160000
N 4 7500 167500
20 % 20 %
A 5 7500 175000
6 5000 180000
L
7 4500 184500
Y 8 4000 188500
9 2750 191250
S
10 1750 193000
I 11 1500 194500

S 12 1500 196000
13 500 196500 10 %
70 %
14 500 197000
15 500 197500
WORK 16 500 198000
SHEET 17 500 198500
18 500 199000
19 500 199500
20 500 200000
 VED ANALYSIS
• Based on critical value & shortage cost of an item
–It is a subjective analysis.
•Items are classified into:
Vital:
•Shortage cannot be tolerated.
Essential:
•Shortage can be tolerated for a short period.
Desirable:
Shortage will not adversely affect, but may be using more
resources. These must be strictly Scrutinized

V E D ITEM COST

A AV AE AD CATEGORY 1 10 70%

B BV BE BD CATEGORY 2 20 20%

C CV CE CD CATEGORY 3 70 10%

CATEGORY 1 - NEEDS CLOSE MONITORING & CONTROL

CATEGORY 2 - MODERATE CONTROL.
CATEGORY 3 - NO NEED FOR CONTROL
 FSN
* Based on the consumption pattern to
combat obsolete items.
* Classification depends on the pattern of
issues from stores.

F – Fast moving
S – Slow moving
N – Non Moving

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Date of receipt or last date of issue,
whichever is later, is taken to determine
the no. of months which have lapsed
since the last transaction.

The items are usually grouped in

periods of 12 months.

It helps to avoid investments in non

moving or slow items.

It is also useful in facilitating timely

control.
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For analysis, the issues of items in past two or three
years are considered.

If there are no issues of an item during the period, it is

“N” item.

Then up to certain limit, say 10-15 issues in the period,

the item is “S” item.

The items exceeding such limit of no. of issues during

the period are “F” items.

The period of consideration & the limiting number of

issues vary from organization to organization..

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