Selective inventory control
- 1. Material Management Selective Inventory Control Presented by: RN Ankita Ashok Kadam PGDHA II (2019-20) Roll no. 04 GICED
- 2. Material Management 1 Introduction Inventory Control Methods of keeping the inventories at approved & desired level so that there is a balance between the carrying costs, capital, blocked & production schedule. Selective Inventory Control Because of the large number of materials used in production at many manufacturing plants, it is desirable to classify materials according to the amount of analysis that can be justified. Selective inventory control means that the method of inventory control varies from item to item and the differentiation should be on selective basis. Several techniques of inventory control are in use and it depends on the convenience of the firm to adopt any of the techniques. The techniques more commonly used are the following 1. ABC Analysis 2. XYZ Analysis 3. HML Analysis 4. VED Analysis 5. FSN Analysis 6. SOS Analysis 7. GOLF Analysis
- 3. Material Management 2 Sr. No. Name Criteria 1. ABC (Always Better Control) Annual Value of consumption of the items. 2. HML (High, Medium, Low) Unit price of the material. 3. VED (Vital, Essential, Desirable) The critical nature of component or material with respect to production. 4. SDE (Scarce, Difficult to Obtain, Easy to obtain) Puchasing problems in regard to availability. 5. GOLF (Govt., Ordinary, Local, Foreign) It is the source from where the material is obtained. 6. FSN (Fast Moving, Slow Moving, Non moving) Criteria is issuing from stores. 7. SOS (Seasonal, Off seasonal) Criteria is Seasonality. 8. XYZ Inventory value of items, of stores.
- 4. Material Management 3 ABC ANALYSIS ABC Analysis popularly known as “Always Better Control” is a very useful approach to material management based on Pareto’s principle of “Vital few & trivial many” based on the capital investment of the item. ABC analysis, therefore, on the basis of cost and its consumption, tends to segregate items into three categories as mentioned above. Each category should be handled in a different way, with more attention being devoted to category A, less to B, and least to C. Category Label Quantity (%) Cost (%) A Outstandingly Important 10 70 B Average Important 20 20 C Relatively Important 70 10
- 5. Material Management 4 “80/20” rule ABC concept is applied to inventory management as a rule-of-thumb. It says about 80% of the rupee value, consumption wise, of an inventory remains availability of stock, are attained. The ABC concept is derived from the Pareto’s 80/20 rule curve also known as the 80/20 concept. This rule, in general, applies well & is frequently used by the inventory managers to put their efforts where greatest benefits, in terms of cost reduction. ABC classifications allow the inventory manager to assign priorities for inventory control. The ABC concept puts emphasis on the fact that every item of inventory is critical & has the potential of affecting adversely productions, or sales to a customer or operations.
- 6. Material Management 5 Suggested Policy Guidelines for A,B & C classes of items A items (High Cons. Val.) B items (Mod. Cons. Val.) C items (Low Cons. Val.) Very strict control Moderate control Loose control No or very low safety stock Low safety stock High safety stock Phased delivery (weekly)months Once in three months Once in six months Weekly control report Monthly control report Quarterly control report Maximum follow up Periodic follow up Exceptional As many sources possible Two or more reliable Two reliable Accurate forecasts Estimates on past data Rough estimate Central purchasing/ storage Combination purchasing Decentralized Max. efforts to control Moderate Min. clerical To be handled by Sr. Officers Middle level Can be delegated
- 7. Material Management 6 XYZ Analysis XYZ analysis highlights the ratio of stock versus consumption to effect better stocking & reordering policy. 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. ‘X’ items which are 10% of no.of items stored, but accounting for 70% of the total inventory value. ‘Y’ items are 20% of no.of items stored and account for 20% of total inventory value. ‘Z’ items are 70% of no.of items stored and account for 10% of the total value. Concept is to classify goods by the amount & cause of variance in demand.
- 8. Material Management 7 HML classification H- High M- Medium L- Low The HML classification is same procedure as adopted in ABC. The core difference is HML classification unit value is the criterion and not the annual consumption value. The inventories should be place in descending order and it is up to management to fix limits of these three categories. The HML analysis is useful for keeping control over consumption at department levels, for deciding the frequency of physical verification, & for controlling purchases. VED Analysis VED: Vital, Essential & Desirable classification
- 9. Material Management 8 VED classification is based on the criticality of the inventories. Vital items – Its shortage may cause havoc & stop the work in organization. They are stocked adequately to ensure smooth operation. Essential items - Here, reasonable risk can be taken. If not available, the plant does not stop; but the efficiency of operations is adversely affected due to expediting expenses. They should be sufficiently stocked to ensure regular flow of work. Desirable items – Its non-availability does not stop the work because they can be easily purchased from the market as & when needed. They may be stocked very low or not stocked. It is useful in capital intensive industries, transport industries, etc. VED analysis can be better used with ABC analysis in the following pattern Items V E D A Constant control & regular stocks Moderate stocks No stocks B Moderate Moderate Very Low stocks C High Moderate Low stocks
- 10. Material Management 9 FSN Analysis Fast, Slow or Non-Moving Material Analysis FSN Analysis report brings out the list of dead material which have not been used at all for quite some time and which should be removed from the stores. This report is based on ratio of movement, which is relation of the total issues during the period of a particular item to its opening stock. To carry out an FSN analysis, the date of receipt or the last date of issue, whichever is later, is taken to determine the number of months, which have lapsed since the last transaction. The items are usually grouped in periods of 12 months. FSN analysis is helpful in determining active items, which need to be reviewed regularly, and surplus items, which have to be examined further. Non-moving items may be examined further and their disposal can be considered. SOS ANALYSIS Seasonal, Off Seasonal Report helps you to view seasonal required items. GOLF ANALYSIS Government, Ordinary, Local, and Foreign Report help you to do material analysis based on location and type of organization.
- 11. Material Management 10 References Lecture notes of Material Management by Dr Dilip Mulchandani Slide share Images from Google