Inventory analysis is the process of examining inventory to determine the optimal amount a business should hold.
While we’ll discuss the five main analyses — ABC, SDE, HML, FSN, and VED — we’ll also describe the advantages of using more non-classified techniques like just-in-time inventory, minimum order quantity (MOQ), reorder point, and safety stock.
At the end of this blog, you’ll be equipped with inventory control techniques that you can leverage for the best results. Correct implementation of these techniques is indispensable for efficient supply chain management. Supply chain professionals, both aspiring and experts, can enrol in supply chain management programmes to brush up on these techniques as well as learn about the critical role technology plays in logistics, procurement, inventory, and vendor management.
5 Benefits of Inventory Analysis
Understanding your inventory' capacity is crucial to building a strong storage unit. Here are the five benefits of employing inventory analysis techniques:
- It saves money by reducing waste and inefficiencies.
- It improves customer service by preventing stockouts.
- Inventory analysis frees up cash flow for other areas by optimising inventory levels.
- It minimises waste by identifying slow-moving or obsolete products.
- Finally, it provides data for making informed decisions on purchasing, production, and sales.
8 Common Methods for Inventory Analysis
ABC Analysis
The ABC model prioritises inventory based on annual consumption value (ACV) and helps businesses focus resources on their most critical items.
Categories
- A (20% of items, 80% of value): It is the most critical category and requires close monitoring and strict controls.
- B (30% of items, 15% of value): It is moderately important and requires moderate monitoring and controls.
- C (50% of items, 5% of value): Judged at the least critical, this needs minimal monitoring and controls.
Steps for ABC analysis
- Gather data related to unit cost, annual demand, and lead time.
- Calculate ACV (unit cost annual demand).
- Sort items by ACV from highest to lowest.
- Define category boundaries based on cumulative ACV.
- Assign categories and develop management strategies like JIT and EOQ models.
FSN (Fast, Slow, Non-Moving) analysis
This classifies inventory based on sales velocity (fast, slow, non-moving) for efficient management.
Categories
- Fast (F): Sell quickly and generate high revenue. Exercise low control here.
- Slow (S): You can see these and review them gradually.
- Non-moving (N): No sales, analyse cause, chances for discounts and write-offs.
Steps for FSN analysis
- Gather data like unit costs, annual demand, and lead time.
- Set thresholds: Define the boundaries for each category based on your specific business context and industry standards. It's common to use percentages of average inventory stay time and average consumption rate as reference points.
- Categorise each item based on the calculated ITR or chosen metrics.
VED (Vital, Essential, Desirable) Analysis
VED analysis categorises inventory items based on their criticality to the business depending on their usefulness. To understand the complexity that goes into this analysis, you can consider a supply chain management course.
Categories
- Vital (V): These are items critical to the core operation.
- Essential (E): These represent items whose shortage wouldn't be catastrophic. Delays or alternative solutions might be possible.
- Desirable (D): Their absence wouldn't significantly impact production.
Steps for VED analysis
- Identify all inventory items. This includes raw materials, work-in-progress, finished goods, and any other items kept in stock.
- Consider factors like production stoppage, cost of delay, and safety implications.
- Categorise each item as V, E, or D based on your evaluation.
- Develop different inventory management strategies for each category.
HTML (High, Medium, Low) Analysis
HML (High, Medium, Low) analysis categorises inventory based on unit cost to prioritise control efforts.
Categories
- High: Costly items (fewer in number) require strict controls due to high financial risk.
- Medium: Moderate cost items need moderate control measures.
- Low: Least expensive items (often the most in number) require minimal controls but benefit from bulk ordering and optimised storage.
Steps for HML analysis
- Collect unit cost and annual demand for each item.
- Set thresholds (percentages or manual cutoffs) to define High, Medium, and Low categories based on the cost distribution.
- Develop different control strategies for each category (e.g., frequent checks for high-cost items and bulk ordering for low-cost items).
SDE (Scarce, Difficult, Easily Available) Analysis
SDE (Scarce, Difficult, Easily available) categorises inventory based on how easy it is to acquire.
Categories
- Scarce: These are items available in limited quantities.
- Difficult: These items pose challenges in procurement and need constant monitoring.
- These are readily available and allow for bulk ordering and less control.
Steps for SDE Analysis
- Collect information on lead times, supplier availability, and potential supply chain disruptions for each item.
- Assess the difficulty of acquiring each item based on scarcity and procurement challenges.
- Assign items to each category based on the evaluation.
- Implement different control and procurement strategies for each category.
Just-in-Time Inventory Management
Just-in-time (JIT) inventory management is like having everything you need right when you need it. Instead of stocking up on supplies, businesses only receive materials as they're needed for production.
This frees up storage space, minimises waste from overproduction, and helps businesses react faster to changing market demands. Plus, they only pay for what they use, which reduces holding costs. Learn more about it in a supply chain management course.
Minimum Order Quantity (MOQ)
Minimum order quantity (MOQ) refers to the smallest number of units a supplier requires a customer to purchase in a single order.
This requirement is often set by manufacturers or wholesalers to ensure their products are sold in bulk rather than individual units. Overall, MOQ is a balancing act between supplier efficiency and buyer flexibility.
Reorder Point
The reorder point (ROP) is a specific stock level at which a business needs to replenish its inventory to avoid stockouts. It acts as a trigger point, prompting an order to be placed with the supplier to ensure a smooth flow of goods and prevent disruptions in production or sales.
Here’s how you calculate the reorder point:
ROP = Daily Sales ✕ Lead Time + Safety Stock
Example:
Daily sales: 10 units
Lead time: 5 days
Safety stock: 20 units
ROP = 10 units/day ✕ 5 days + 20 units = 70 units
Conclusion
From figuring out what needs the most attention (ABC) to getting the right stuff at the right time (JIT), inventory control techniques are all about minimising wastage and maximising revenue. But you must note that these techniques keep evolving.
That's where Imarticus’s Advanced Certification in Digital Supply Chain Management/Analytics comes in. It teaches you the latest strategies and opens doors to amazing career opportunities. Register today!
