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Material Criticality Analysis

Inventory management is the ongoing process of moving parts and products into and out of a company’s location(s). Companies manage their inventory on a daily basis as they place new orders for products and ship orders out to customers. It’s important that business leaders gain a firm grasp of everything involved in the inventory management process. That way, they can figure out creative ways to solve inventory management challenges by finding the right solutions.

The process of understanding the moving parts & products combined with the knowledge of the demand for stock/product. It is the technique to determine the optimum level of inventory for a firm.

    Purpose of ABC Analysis (Based on consumption value per year):

    ABC analysis classifies the materials based on their consumption during a particular time period (usually one year)

    In day to day warehouse operations, materials are some time under issued, over issued, issued and not accounted into the system, misplaced, etc. This results into inaccuracy in the inventory. Cycle counting is the process to count and reconcile the materials. Ideally, every material in the warehouse should be counted during a fixed interval (every year) for maintaining 100% accuracy, but counting & reconciling every material is not cost effective and very expensive. To count the accuracy of the inventory in a cost-effective manner, it is recommended to count the materials based on inventory classification

    A Cumulative percent: 0-75%
    B Cumulative percent: >75-90%
    C Cumulative percent: >90-100%

    Steps Performed on ABC Analysis:

  • Identify the objective and the analysis criterion
  • Collect all the data about the inventory and calculate the consumption or sale value
  • Arrange all the consumption values in descending order of values
  • Create next column and start adding the cumulative total of consumption value

    Purpose of FMS Analysis (Based on consumption rate):

    FMS Analysis is based on the rate of issue or rate of usage of spare parts. This classification system categorizes the items based on how frequently the parts are issued and how frequently they are used It helps in the arrangement of stocks in the stores and in determining the distribution and handling patterns. It also helps to avoid investments in non-moving or slow items. It is also useful in facilitating timely control

    Usual classification of Items at Inventory can be classified based on the following criteria

    F Fast Moving
    M Medium Moving
    S Slow Moving

    Steps Performed on FMS Analysis:

  • Classification is based on the pattern of issues from stores and is useful in controlling obsolescence
  • Date of receipt or last date of issue, whichever is later, is taken to determine the no. of months which have lapsed since the last transaction
  • Based on Number of Months categorize as F, M & S

    Purpose of VED Analysis (Based on criticality & impact):

    VED analysis classifies the materials according to their criticality and impact to the production process or other services i.e. how and to what extent the material M1 is going to effect the production if the material M1 is not available

    It finds out which materials and parts are valuable, which are essential and which are desirable. It is best suited for spares inventory & determine the stocking levels of spare parts

    V-Vital Average Working Hours: >= 4 Hours
    E-Essential Average Working Hours: >=1, < 4 Hours
    D-Desirable Average Working Hours: < 1 Hour

    Steps Performed on VED Analysis:

  • Identification of factors essential for VED Analysis
  • Calculate the sum of Actual working hours
  • Finding out how many times the order was placed
  • Calculate the average working hours

    Purpose of XYZ Analysis (Based on stock value accumulation):

    XYZ analysis classifies the materials based on stock value accumulation. It is calculated by dividing an item's current stock value by the total stock value of the stores

    It is one of the basic supply chain techniques, often used to determine the inventory valuation inside the stores. It is quite strategic as it can form the basis of various activity including leading plans on alternative stocking arrangements

    The items are first sorted on descending order of their current stock value. The values are then accumulated till values reach say 75% of the total stock value. These items are grouped as 'X'. Similarly, other items are grouped as 'Y' and 'Z' items based on their accumulated value reaching another 15% & 10% respectively

    The XYZ analysis gives, you an immediate view of which items are expensive to hold. Through this analysis, you can reduce your money locked up by keeping as little as possible of these expensive items

    X Cumulative percent: 0-75%
    y Cumulative percent: >75-90%
    Z Cumulative percent: >90-100%

    Steps Performed on XYZ Analysis:

  • Identify the objective and the analysis criterion
  • Collect all the data about the inventory
  • Divide Item's current stock value (Cost per piece) with the total stock value (Total cost)
  • Arrange all the consumption values in descending order of values
  • Create next column and start adding the cumulative total
  • Assign the Category based on the accumulated value as X, Y & Z

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