ABC Classification: Understanding Inventory Consumption

In figure 4.2.1, it is shown that only 20% of the items contribute to the 80% of the total consumption value of all the items in the inventory; 20% of the items contribute to 10% of the total consumption; and 60% of the items contribute to about 10% of the total consumption. These items are classified as A, B and C respectively. There is no exact range for these classifications. Items that have high consumption value are categorised as category ‘A’ and that have very low consumption value are categorised under ‘C’. Figure 4.2.1: ABC Classification

ABC classification depends on both the number of units consumed per year and the value per unit. Therefore, if the number of units consumed per year increase or the value per unit increase, the

An inventory record of the annual demand and per unit cost for each variety of flowers is maintained. Table 4.2.1 shows the inventory record. Help Sheela in decision making on stock maintenance using ABC analysis. Table 4.2.1: Inventory Record of Sheela’s boutique

Flower Code Item No. Cost per unit (₹) Annual Demand (units)

A1

A2

Therefore, these items are classified under category ‘A’.

As the cumulative cost percentage of the items 1, 2, 3, 5, 6, 9, 10, 11, 14, 18 and 19 worked out to be only 6.06% and that is very small, they are classified under category ‘C’.

Remaining items 4, 7, 8, 15, 17 and 20 are moderately contributing to annual costs, they are classified under the category ‘B’.

ii. VED Analysis

At times, certain materials are important by their absence, that is if they are not available, they hold up the production and there are high costs if shut-down or slow-down of production. By themselves these items may not be highly priced in the market. Though the investment in these items may be small, lack of any of these items bring the production process to a grinding halt. The cost associated with items due to their absence is known as ‘nuisance value’. VED classification is a kind of classification of items that deals with the critical nature of the items such as whether they are ‘vital’ (V) to the production process, or ‘essential’ (E) or just ‘desirable’ (D). Similar to the ABC analysis, VED analysis also has a major role in inventory management. VED ranking can be done based on the shortage cost of the materials that can either be quantified or qualitatively