ABC Analysis, VED Analysis, SDE Analysis, HML and FSN Analysis

ABC Analysis

In order to exercise effective control over materials, A.B.C. (Always Better Control) method is of immense use. Under this method materials are classified into three categories in accordance with their respective values. Group ‘A’ constitutes costly items which may be only 10 to 20% of the total items but account for about 50% of the total value of the stores.

A greater degree of control is exercised to preserve these items. Group ‘B’ consists of items which constitutes 20 to 30% of the store items and represent about 30% of the total value of stores.

A reasonable degree of care may be taken in order to control these items. In the last category i.e. group ‘Q’ about 70 to 80% of the items is covered costing about 20% of the total value. This can be referred to as residuary category. A routine type of care may be taken in the case of third category.

This method is also known as ‘stock control according to value method’, ‘selective value approach’ and ‘proportional parts value approach’.

If this method is applied with care, it ensures considerable reduction in the storage expenses and it is also greatly helpful in preserving costly items.

VED Analysis

Vital essential and desirable analysis is used primarily for the control of spare parts. The spare parts can be divided into three categories:

(i) Vital

(ii) Essential

(iii) Desirable

(i) Vital: The spares the stock out of which even for a short time will stop production for quite some time and future the cost of stock out is very high are known as vital spares.

(ii) Essential: The spare stock out of which even for a few hours of days and cost of lost production is high is called essential.

(iii) Desirable: Spares are those which are needed but their absence for even a week or so will not lead to stoppage of production.

The criterion for this analysis is the availability of the materials in the market. In industrial situations where certain materials are scarce (specially in a developing country like India) this analysis is very useful and gives proper guideline for deciding the inventory policies.

The characteristics of the three categories – SD and E – are:

Refers to scarce items, items which are in short supply. Usually these are raw materials, spare parts and imported items.

Stands for difficult items, items which are not readily available in local markets and have to be procured from faraway places, or items for which there are a limited number of suppliers; or items for which quality suppliers are difficult to get.

Refer to items which are easily available in the local markets.

HML Analysis

H-M-L analysis is similar to ABC analysis except the difference that instead of “Annual Inventory Turnover”, cost per unit criterion is used.
The items under this analysis are classified based on their unit prices. They are categorized in three groups , which are as follows

H-High Price Items
M-Medium Price Items
L-Low Price Items

Objectives of hml analysis

Determine the frequency of stock verification
To keep control over the consumption at the department level
To evolve buying policy, to control purchase
To delegate the authority to different buyer
Determine the frequency of stock verification
To keep control over the consumption at the department level
To evolve buying policy, to control purchase
To delegate the authority to different buyer

FSN Analysis:

Here the items are classified into fast-moving (F), slow-moving (S) and Non-moving (N) items on the basis of quantity and rate of consumption. The non-moving items (usually, not consumed over a period of two years) are of great importance. It is found that many companies maintain huge stocks of non-moving items blocking quite a lot of capital.

Moreover, there are thousands of such items. Scrutiny of these items is made to determine whether they could be used or to be disposed off. The classification of fast and slow moving items helps in arrangement of stocks in stores and their distribution and handling methods.