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VED Analysis
SDE Analysis
EOQ
MUSIC-3D
HML Analysis
High, Low Medium (Price criterion)
Cut off lines are fixed by management
HML Analysis helps to
o Assess storage and security requirements
o To keep control over consumption at the
departmental head level
o Determine the frequency of stock verification
o To evolve buying policies to control purchases
o To delegate authorities to different buyers to
make petty cash purchases.
VED Analysis
Vital, Essential Desirable
Based on criticality.
Vital – production would come to halt.
Essential – whose stock out cost is very high.
Desirable – items which do not cause any
immediate loss of production
It is advantageous to use more than one
method. E.g. ABC and VED analysis together.
SDE Analysis
Scare Difficult and Easy
Based on problems of procurement:
o Non-availability
o Scarcity
o Longer lead time
o Geographical location of suppliers and
o Reliability of suppliers etc
Scare: short in supply, imported or canalized
through government agencies.
o Best to procure once in a year in spite of effort
and expenditures involved in the procedure of
import.
Difficult: available indigenously but not easy to
procure
EOQ (Economic Ordering Quantity)
Important assumptions
Demand is known, constant, and independent
Lead time is known and constant
Receipt of inventory is instantaneous and
complete
Quantity discounts are not possible
Only variable costs are setup and holding
Stock outs can be completely avoided
If the quantity ordered is 500 units all 500
hundred arrive at one time
Quantity jumps from 0 to 500 (Q)
Demand is constant and hence inventory
drops at uniform rate
Inventory Usage Over Time
on hand
(maximum
Q
inventory
level) 2
Minimum
inventory
Time
Minimizing Costs
Objective is to minimize total costs
Minimum
total cost
Annual cost
Holding cost
or Inventory
carrying cost
curve
Setup (or order)
cost curve
Optimal Order quantity
order
quantity
The EOQ Model
Q = Number of pieces per order
EOQ= Optimal number of pieces per order (EOQ)
D = Annual demand in units for the Inventory item
S = Setup or ordering cost for each order
H = Holding or carrying cost per unit per year
Annual setup cost = (Number of orders placed per year)
x (Setup or order cost per order)
D (S)
=
Q
Annual holding cost = (Average inventory level)
x (Holding cost per unit per year)
Order quantity
= (Holding cost per unit per year)
2
= Q ( H)
2
Optimal order quantity is found when annual setup cost
equals annual holding cost
D Q
S = H
Q 2
Solving for Q*
2DS = Q2H
Q2 = 2DS/H
EOQ = 2DS/H
EOQ – ADVANTAGES
EOQ – LIMITATIONS
- Criticality (Critical/Non-critical)
- Availability (Short/Long-lead Time)