Selective Inventory control Techniques

 

Selective Inventory control Techniques

Introduction:

In many ways of life whether it is personal or company, we encounter a Peculiar phenomenon which  can be broadly termed as “the vital few and trivial many”. For example if you take a television set about 5% of its parts contribute to 80% of the cost. this is true for each and every scenario whether it is a car or refrigerator or any machine. Even if we can see, this is true in any business scenario,  10% of the products contribute to 90% of the sales and 75% of the total profits.

Interesting phenomenon was first observed and discovered by a person named Pareto and this is popularly called Pareto's law. He was German economist who worked out the distribution of incomes  and found that 20% of the people got 80% of the money. This law has been used in many contexts outside welfare economics.

The same interesting phenomenon is noticeable in Materials Management also.  After proper analysis, what would find for example the total number of materials in stock 20% contribute to 80% of the value that 20% are the most difficult to obtain, most critical in so far as the company's production is concerned. The pertinent way of looking at the problem therefore would be to control the Inventory of high value items cause they give us the greatest returns and not to care much for the low value items because the returns are low. In fact an inventory controller should always take care to see that the cost of controlling is not more than the returns available from such a control and the answer to this kind of problems is the selective inventory control and Inventory Management approach.

Selective inventory control:

In the below table we are going to get a summary of the different selective inventory control approaches.

Selective Inventory control

Classification	Criteria
A-B-C (nickname Always Better Control)	The Annual Value of consumptions of the items concerned. Do not confuse with the unit price of the item)
H-M-L (High, Medium, Low)	Unit price of the material. It does not take consumption value in calculation
V-E-D (Vital, Essential, desirable)	By the critical nature of the component
S-D-E (Scarce, Difficult to obtain, Easy to obtain)	Purchasing problem in regard to availability
F-S-N (Fast moving, Slow moving, Non-moving) or F-M-R (Fast, Medium and Rare)	Issuance from Stores
S-O-S (Seasonal, off-seasonal)	Seasonalities, mostly applies to commodities

A-B-C Classification:

ABC analysis is a Basic technique of inventory control and it is often said to be it’s starting point. This technique can be applied to almost all aspects of materials management such as purchasing, receiving, inspection, store keeping, inventory control, value analysis and many more. There are many Materials Planning Techniques where this A-B-C classification is used.

The ABC classification is based upon the 70-20-10 principle. The actual reason for this analysis is to concentrate on the items which are contributing the highest value in terms of consumption. Reason behind, these items may cause a significant impact on the process flow as well as the money in terms of inventory. Therefore, the control mechanism must be very specific.

There is my another detailed article on the A-B-C analysis.

ABC Analysis

In the below metrix of A-B-C categories of items, the inventory control and monitoring strategy should be implemented

A	B	C
Tight control on stock levels	Moderate control	Lose control
Only exact requirement to be procured, more than one source is preferred, centralized purchasing for better spend control	More or less exact requirement, reduce lead time	On estimated usage
Individual issuance during against production orders and in terms of charging out cost to consumption	Individual posting during material issuance	Collective posting or preferably none at all (Bulk or Backflush)
Very low buffer stock or none at all	Exact requirement to be worked out	large safety stock can be defined
Regular expediting and follow up	some follow up	No need to indulge time in follow up
Very strict consumption control by laying down norms and standards	Consumption control is highly desirable	Though consumption control is desirable, but no need to indulge much time
Material planning should be very accurate especially in regards to forecast	Past consumption may be taken as basis	Rough estimates would be satisfactory
Concerted efforts in cost reduction through modern techniques like value analysis. Efforts should be more on import substitution.	moderate efforts would be sufficient	An annual review
Monthly or quarterly cycle counting with strict adherence	Quarterly cycle counting is sufficient	Annual inventory counting is sufficient

ABC Graphical representation

H-M-L Classification:

High medium and low categorisation in the field of inventory is based on the unit price of each and every item lying in the inventory.  the same procedure as for ABC analysis can be adopted here,  only difference being that it is the unit value which is the basis of criterion and not the annual consumption value.  item should be listed out in descending order value and the management Matrix limits for deciding three categories.  for example,  it may be decided that all items of Unity value above 1000 will be HIGH category (H-category) items,  those between rupees 100 to 1000 will be Medium category (M category) items,  and those below Rupees 100 will be low category (L-Category) items. On this basis the management may delegate authority to various subordinate officers, the management may decide that the items of the value above a unit of rupees 10000 are only sanctioned by the head of the department.

V-E-D Classification:

V-E-D stands for vital, essential and desirable.  this type of classification is applicable in the case of spare parts.  large Industries like pharmaceutical industries, chemical industries and continuous plants,  generally huge number of machineries are installed and a single breakdown may cause a big loss to the organisation.Therefore, spare parts management is very much important when the maintenance comes into the picture. about spare parts is that they do not follow a predictable demand pattern as in the case of raw materials.  the result is that if you follow the usual method outlined earlier,  we might get into difficulties when the demand suddenly changes.  for example the older the machine gets, the greater may be the maintenance spares required. To  get over this difficulty,  analysis is required.  use the categorisation is made in terms of the importance or criticality of the path to the operation of the plant.  if it is very vital it is given as V classification and if it is not so important it is given as D classification. How such a classification will purely depend on the machinery or equipment involved and one's own experience and the ease of availability of the parts.  for example,  if some  spare parts are available off the shelf from the supplier end,  there is no point in categorising the item as V-class. on the other hand a minor in might automatically gets a V classification.

 For V category items reasonably large quantities of stocks might be necessary as the non availability of this kind of spares may cause a huge loss if breakdown happens. for class items stock required to be kept. 

S-D-E Classification:

These letters stand for scarce items, which are difficult to obtain and those which are fairly easy to obtain.   it is quite obvious that where an item is scarce and it is an A-class item, we cannot apply the same procedure it's stolking policy. take for example and item which is imported it would be quite absurd for anybody to say that it should be procured once in six weeks. It would be best to obtain it once in a year, considering  the time, effort and expenditure involved in the procedure for import.

scares item might be an item which is not easily available in the market and might require sources development or else it might be an item which is very difficult to manufacture or there are only one or two manufacturers who have to be given orders several months in advance and so on.

F-S-N/F-M-R Classification:

classification takes into account the pattern of issuance from stores to production.  three letter stands for or fast moving,  slow moving and non moving (for F-S-N)  and fast medium and rare (for F-M-R). it is important to understand that this classification does not take the consumption into the consideration, it only takes issuance patterns from stores. This classification comes in very handy when we desire to control obsolescence.  items classified as non-moving require very great attention. there may be several reasons why an item has go into this non-moving category. may have been a change in the technology for change in the specification of a particular spare part of the item may  no longer be in use. when an F-S-N or F-M-R classification is made, Also information stands out permanently enabling management to act on it in the best interest of the organisation.

S-O-S Classification:

 some of the items required may be seasonal in nature and may require special purchasing and stocking strategies.  many commodities especially of Agricultural origin and seasonal in character have to be purchased at the appropriate time. one cannot apply Economic Order Quantity here as inventory is at the time of procurement will be extremely high but this cannot be helped.

 buying and stocking strategy for seasonal items depends on a large number of factors and more and more sophistication is taking place in this sphere, and mostly operational research techniques are used to obtain optimum results. 

Using Combinations of Selective inventory control techniques:

It is always a wiser approach to use these classifications in combination. for example ABC classification can be used along with H-M-L, V-E-D or F-M-R category to achieve better results.Each combination will give a specific guideline for the purpose of control. in fact these classifications may be combined together form a matrix.

the following table indicates the procedure of using ABC and VED together:

Class	V items	E items	D items
A class	Constant control and regular follow up	Moderate stocks	Nil stock
B class	Moderate stocks	Moderate stocks	Very low stock
C class	High stocks	Moderate stocks	Low stock

The following table will provide a better understanding of the combination of ABC category and FMR category

Class	F	M	R
A	On stock with careful follow up	On stock with careful follow up	Big risk of Obsolescence, avoid stocking policy
B	On stock with careful follow up	On stock with careful follow up	Big risk of Obsolescence, avoid stocking policy
C	On stock with Higher Safety stock	On stock with Higher Safety stock	No requirement to keep stock

Conclusion:

It is Apparent from what has been said in this article that here is a simple rule of thumb to determine the type of strategy to be deployed for procurement or stocking.No common procedure can be applied for all the items. there would be special peculiarity for each item and search facial treatment would have to be meted out to overcome problems or difficulties in respect of each type. the different types of classifications would give an executive a clear idea as to what are the implications of each and this would give him the necessary clues as how to act and what decisions to take. It will also be clear that none of these classifications should be used in isolation.  A person should take an integrated view and decide the best course that will give the best overall results.