Companies employ different kinds of analysis on inventory. Some are focused on consumption, while others may be focused on cost or criticality. But there is no comprehensive analysis, which provides all the answers in one go, affecting organizations capability to understand the broader picture. Commonly used analysis methodologies are as follows:
- ABC Analysis (A, B, and C denotes inventory categorization based on value) for annual consumption
- VED Analysis (Vital-Essential-Desirable) for criticality for production
- SDE Analysis (Scarce-Difficult-Easy) for availability
- HML Analysis (High-Medium-Low) for weight / cost permit
- FSN Analysis (Fast-Slow-Non moving) for consumption rate
Inventory is classified in various organizations in different ways. In that case, standardization becomes the key. But in reality, most of the companies don’t give importance to this aspect of inventory management, although companies’ who have given importance to this fact have benefited a lot in the long run. They are able to manage materials more effectively and have the right materials available at the right time & cost. Every organization dealing with a lot of inventory should have a focus in this direction. There should be a specific team handling this aspect of material management.
Depending on the type of industry, companies derive inventory policies suitable for their business. The cost of ordering and carrying inventory are classified as the supply side costs and this determines the quantity to be ordered during each replenishment stage. The under stocking and over stocking costs are classified as the demand side costs and that helps in the determination of the amount of variations in demand and the delay in supplies which the inventory should withstand.
Inventory carrying cost sometimes is very huge for companies. The extra cost which they carry affects the bottom line, productivity and in-turn affects the profit margins.
The inventory carrying cost includes:
- Interest on capital
- Insurance and tax charges
- Storage costs –labor, the costs of provisioning the storage area and facilities like bins, racks, etc.
- Allowance for deterioration or spoilage
- Salaries of stores staff
The inventory carrying cost varies in a typical manufacturing scenario from 25 to 30 percent. A major portion of this is accounted for the interest or capital which depends on the fiscal policies of the government. In the analysis and use of mathematical formula, only the variable costs should be considered, as the fixed costs will be constant irrespective of the number of orders placed or the inventory carried.
There are basically four types of inventory which a manufacturing firm focuses on.
- Raw materials and purchased components – Type 1
- In process inventory – Type 2
- Finished Products – Type 3
- Maintenance, repair and tooling inventories – Type 4
– Nishant Bahadur, Supply Chain Consultant, Bristlecone
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