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ABC analysis and otherinventory models

Case Study-4: Chemical

Company

Group-8

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Inventory Control Techniques

Effective inventory management requires the understanding

and knowledge of the nature of inventories and for this

purpose, there are some models ABC analysis

HML analysis

SAP analysis

VED analysis

FSN analysis

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Classification of Inventory Control

TechniquesTechnique Basis Main Use

ABC (always better

control)

Value of Conception To controlraw materials,

components and WIP inventories in

the normal course of business

HML (high, medium,

low)

Unit price of the

material

Mainly to controlpurchase

VED (Vital, essential,

desirable)

Criticalityof the

component

To determine the stocking levelof

spare parts

FSN (Fast moving, slowmoving, non moving)

Consumption ofpatternof the components

To control Obsolescence

SAP (Scarce, Available,

Plenty toobtain)

Problems faced in

procurement

Lead time analysis and purchasing

analysis

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ABC Analysis One of the most important considerations of control is the value of

annual consumption of inventory items in a year.

Only a small numberof inventory items consume a verylarge shareof inventory consumption during the year.

A little larger numberof inventory items covers a moderate share ofannual inventory consumption.

A verylarge numberof items just cover a very small share of annualinventory consumption.

These facts gave birth to the concept of ABC analysis.

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Quantitative analysis It has been observed that in an industrialunit only 20% of items have 75% of the

annual inventory consumption,

30% of the items have 15% of annual inventory consumption.

50% of the items have only 10% of the annual inventory consumption.

Since 75% of the annual consumption of inventory is covered byonly 20% of theitems in the inventory, these items deserve highest attention and are classifiedas A items.

Similarly 30% of the items covering 15 % of the inventory investment are B classitems

Balance 50% of the inventory items are termed as C class items.

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ExampleItem Description Annual Consumption in

units)

Cost per unit (Rs)

Hydrochloric Acid

Benzene

Packing Drums

Lac

Wax

Ethylene

Chlorine

Methyl AlcoholDenatured Spirit

Sodium Acetate

Castor Oil

Commercial Camphor

Commercial gum

Amide

Corrugated cartons

Linseed Oil

Lemon grassCommercial talcum powder

Red oxide

Xylene

Toluene

Ethyl acetate

Kerosene oil

Petroleum jelly

Coal tar

Refined charcoal

4500

650

2000

55

4000

7000

2500

400075

100

100

100

25

2500

50

100

60200

900

1000

400

50

100

100

50

150

4 / litre

9 / kg

15 per drum

10 / kg

1 / kg

5.75 / kg

5.50 / kg

11/litre12 / litre

13 / kg

35 / kg

6 / kg

5/kg

1/kg

10 / piece

90 / kg

150 / kg25/kg

5/kg

12/kg

7/kg

13/kg

20/litre

25/kg

12/kg

35/kg

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Determination of rank by annual usageItem Description

Annual Consumption in

units)Cost per unit (Rs) Annual Usage Rank

Hydrochloric Acid 4500 4 18000 4

Benzene 650 9 5850 9Packing Drums 2000 15 30000 3

Lac 55 10 550 24

Wax 4000 1 4000 13

Ethylene 7000 5.75 40250 2

Chlorine 2500 5.5 13750 5

Methyl Alcohol 4000 11 44000 1

Denatured Spirit 75 12 900 20

Sodium Acetate 100 13 1300 19

Castor Oil 100 35 3500 14

Commercial Camphor 100 6 600 22

Commercial gum 25 5 125 26

Amide 2500 1 2500 16

Corrugated cartons 50 10 500 25

Linseed Oil 100 90 9000 7

Lemon grass 60 150 9000 8

Commercial talcum powder 200 25 5000 11

Red oxide 900 5 4500 12

Xylene 1000 12 12000 6

Toluene 400 7 2800 15

Ethyl acetate 50 13 650 21

Kerosene oil 100 20 2000 18

Petroleum jelly 100 25 2500 17

Coal tar 50 12 600 23Refined charcoal 150 35 5250 10

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Categorizing items in ABC rankingRank

Item Description Cumulative annual

usage (Rs.)Annual usage %

Category

assigned

1 Methyl Alcohol 44000 44000 20.07986309

A2 Ethylene 40250 84250 38.44837422

3 Packing Drums 30000 114250 52.139189964 Hydrochloric Acid 18000 132250 60.35367941

5 Chlorine 13750 146000 66.62863662

6 Xylene 12000 158000 72.10496292

7 Linseed Oil 9000 167000 76.21220764

B

8 Lemon grass 9000 176000 80.31945237

9 Benzene 5850 181850 82.98916144

10 Refined charcoal 5250 187100 85.38505419

11 Commercial talcum powder 5000 192100 87.66685682

12 Red oxide 4500 196600 89.72047918

13 Wax 4000 200600 91.54592128

C

14 Castor Oil 3500 204100 93.14318311

15 Toluene 2800 206900 94.42099258

16 Amide 2500 209400 95.5618939

17 Petroleum jelly 2500 211900 96.70279521

18 Kerosene oil 2000 213900 97.6155162619 Sodium Acetate 1300 215200 98.20878494

20 Denatured Spirit 900 216100 98.61950941

21 Ethyl acetate 650 216750 98.91614375

22 Commercial Camphor 600 217350 99.18996007

23 Coal tar 600 217950 99.46377638

24 Lac 550 218500 99.71477467

25 Corrugated cartons 500 219000 99.94295493

26 Commercial gum 125 219125 100

219125

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Advantages

Helps to exercise selective control

Gives rewarding results quickly

Helps topoint out obsolete stocks easily.

In case of A items careful attention can be

paid at every step such as estimate ofrequirements, purchase, safety stock,receipts, inspections, issues, etc. & closecontrol is maintained.

In case of C items, recording & followup,etc. may be dispensed with or combined.

Helps betterplanning of inventory control

Provides sound basis for allocation of funds &human resources.

Disadvantages

It doesnt take into account the criticality ofan item.

Proper standardization & codification ofinventory items needed.

Considers only money value of items &neglects the importance of items for theproduction process or assemblyorfunctioning.

Periodic review becomes difficult ifonly ABCanalysis is recalled.

When other important factors make it

obligatory to concentrate on C items more,the purpose of ABC analysis is defeated.

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HMLAnalysis

The HML classification is similar to the ABC classification, except for the fact

that instead of consumption values of items, their units values are

considered. Items are classified on the basis of theirunit value into:

H= High value items

M= Medium value items

L=Low value items

Items are listed out in descending order of unit value andmanagement then decides the limits for determining 3 categories.

Delegation of authorities is done for sanctioning of itemsaccording to their values.

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Advantages

Assess storage and security

requirements

To keep control over consumption at

the departmental head level

Determine the frequency of stock

verification

To evolve buying policies to control

purchase

To delegate authorities to different

buyers to make petty cash purchase

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Item Description Annual Consumption in units) Cost per unit (Rs) RankCategory

assigned

Lemon grass 60 150 1 HLinseed Oil 100 90 2

M

Refined charcoal 150 35 3

Castor Oil 100 35 4

Commercial talcum powder 200 25 5

Petroleum jelly 100 25 6

Kerosene oil 100 20 7

Packing Drums 2000 15 8

Sodium Acetate 100 13

9

Ethyl acetate 50 13 10

Xylene 1000 12 11

Denatured Spirit 75 12 12

Coal tar 50 12 13

Methyl Alcohol 4000 11 14

Lac 55 10 15

Corrugated cartons 50 10 16

Benzene 650 9 17

L

Toluene 400 7 18

Commercial Camphor 100 6 19

Ethylene 7000 5.75 20

Chlorine 2500 5.5 21

Red oxide 900 5 22

Commercial gum 25 5 23

Hydrochloric Acid 4500 4 24

Wax 4000 1 25

Amide 2500 1 26

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VEDAnalysisVED- vital, essential & desirable- analysis is used primarily for controlof

spare parts. The spare parts can be divided into 3 categories-

Vital

Essential

Desirable

Classification of items based on critically. Critically means how amachine is important toproduction. If the machine stops, how manymachines and workstations will come to a halt? In monetary terms,how much loss toproduction occurs?

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Vital: The spares, the stock-out ofwhich even for a shorttime will stopproduction for quite sometime are vital spares.

Essential: The spares, the absence ofwhich cannot betolerated for more than few hours or a day & which areessential for the production to continue, are essential spares.

Desired: The desirable spares are those spares which areneeded but their absence for even a week or sowill not leadto stoppage ofproduction.

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FN

SA

nalysisFNSD analysis divides the items of stores into 4

categories in the descending orderofimportance oftheir usage rate.

F stands for fast moving items that are consumed in ashort span of time.

N stands for normal moving items which areexhausted over a period of a yearor so.

S indicates slow moving items which are not issued atfrequent intervals & are expected to be exhaustedover a period.

D means dead items & the consumption of such itemsis almost nil.

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Advantages

Rate of movement of material in store andconsumption pattern forms the basis ofclassification.

Necessary to control obsolescence

The demand for fast moving items is veryhigh, so there shouldn't be shortage of items.

Slow moving items are with low turnovers so

these are not issued at frequent intervals.

Items with nil consumption come under nonmoving such as obsolete inventory.

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SAPAnalysis

Done on the basis of problem faced in the procurement of the items.

Three letters stand for Scarce, Available and Plenty to obtain.

Adopted by purchase department to determine the method of buying

and to fix the responsibilities of the buyer.

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Thank You

Group-8

Shray Arora-8

Bakul Chowdhary -9

Karan Gomber-18

Payal Gosar-19

Jatin Goyal-20

Ankit Patel-48

Nitin Sarawagi-53