Inventory Classification Models
To exercise proper control over the inventory items, organizations classify and categorize these items. This classification allows operations managers in devising control plans relevant and effective for items with similar attributes. These methods are sometimes called selective control methods.
ABC Classification
ABC is one of the most widely used inventory classification models otherwise known as "Always Better Control" model. As per ABC classification, items are classified on the basis of their annual consumption value. In an organization, few items have maximum turnover in terms of annual consumption or usage value. Annual usage value of an item is given by the relationship
Annual usage value = annual requirement × per unit cost
Category 'A' includes items that account for approximately 10% of the total inventory items and 75% of the inventory investment. These items need high level of control.
Category 'B' includes items that account for approximately 15% of total inventory items and inventory investments.
Category 'C' includes items that account for approximately 75% of the total inventory items with approximately 10% of the total inventory investment. The ABC classification method is described in detail in Chapter 12.
VED Classification
VED classification is based on the importance of a particular item in the production process. Under VED, the items, which are critical for production are classified as V (vital), the items, which are important in the production process but not critical are classified as E (essential) and the items, which consists of non essential and do not influence the production process are classified as D (desirable). Items categorized as V need maximum control and investment. V items may not be the most expensive but are critical to the production process. ABC classification of items is based on the annual usage value whereas VED method is based on the criticality of the item in the production process.
FSND Classification
Under FSND classification, goods are classified on the basis of their turnover. F items are fast moving, S items are slow moving and N items are non-moving items and D items are dead or the items which have not been issued for few years. In most cases, the items identified as D are normally sent for disposal. The classifications of items as FSND are based on the number of issues or withdrawal of items from stores over a period of time. This period is decided based on the kind of inventory a firm is holding. Time period for the movement of inventory in a steel factory may be different from that of an electronics firm.
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