Inventory & stock control management

Module -3 - Selective Inventory control methods & Application

Objectives :

•To know about the terminology related to Selective Inventory Control Methods

•To acquaint with why selective inventory control methods are important?

•To understand the Selective inventory control methods

•To learn and exercise the application of Selective inventory control methods

•How to control the cost of inventory by use of Selective control methods

•How to create a Spare part interchangeability record for spares

•How to decide upon the spares stocking philosophy

•Data management thru the SPIR to CMMS System

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 Inventory & stock control management
Module -3 - Selective Inventory control methods & Application
Functional aspect of Teams / departments associated with
Inventory & stock control management

•Ensure the availability •Best supplier

•Review of Spares •Lead Time
•Review of other critical management
inventory •Economic order
•Shut down inventory quantity
•Source of vendor

Procure-
User Dept.
-ment

Receipt &
finance
Stores
•Receipt of materials
•Payment process •Inspection & binned
•Supplier •Storage location
documentation
•Issue of materials
•Budget update
•Maintain of inventory cost
•Cost booking to cost
centre •Regulate the inventory cost
•Analysis of different inventory
w.r.to cost & use

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 SELECTIVE INVENTORY CONTROL

The Inventory of an Industrial firm generally comprises thousands of items with

 Diverse Price
 Usage
 Lead Time
 Procurement & Technical aspect

It is neither desirable nor possible to exercise the same degree of control over all those items

Hence, Organization has therefore to be selective in its approach to control its investment in various types
of stocks & Inventories.

Such a systems is known as selective Inventory Control System.

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SELECTIVE INVENTORY CONTROL METHODS

ABC
Analysis

SDE XYZ
Analysis Analysis

HML FSN
Analysis Analysis

VED
Analysis

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SELECTIVE INVENTORY CONTROL - ABC ANALYSIS
 Concept :
ABC analysis is a basic technique of inventory control and to classify items into
a number of categories , Generally in three categories
based on their annual consumption value

 A- 5 to 10 % of the total no. of items account for 70% of total annual consumption value

 B- 10 to 20 % of the total no. of items account for 20% of total annual consumption value

 C- 70 to 80 % of the total no. of items account for 5% of total annual consumption value
Benefits of ABC Analysis

A Category : Strict control , Very low stock & centralized purchase

B Category : Moderate control , Medium stock & centralized / Decentralized purchase

C Category : Simple control , High stock & Decentralized purchase

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STEP INVOLVED IN IMPLEMENTING THE ABC ANALYSIS

 Classify ,determine expected use & price of the inventories

 Determine total value of item(expected unit X unit price)
 Rank the items (according to total value)
 Compute the ratios (no. of unit/total unit) & (each value of
item/total value of all item)
 Combine on the basis of relative values (A,B,C)

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ABC CLASSIFICATION

 Class A
 5 – 15 % of units
 70 – 80 % of value
 Class B
 30 % of units
 15 % of value
 Class C
 50 – 60 % of units
 5 – 10 % of value

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ABC CLASSIFICATION: EXAMPLE -1

PART UNIT COST ANNUAL USAGE

1 $ 60 90
2 350 40
3 30 130
4 80 60
5 30 100
6 20 180
7 10 170
8 320 50
9 510 60
10 20 120

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ABC CLASSIFICATION: EXAMPLE-1 (CONT.)

TOTAL % OF TOTAL % OF TOTAL

PART PART
VALUE UNIT
VALUE COST ANNUAL%USAGE
QUANTITY CUMMULATIVE
9 1
$30,600 $ 60
35.9 6.0 90 6.0
8 16,000
2 18.7
350 5.0 11.0
2 14,000 16.4 4.0
A40 15.0
3 30 130
1 5,400 6.3 9.0 24.0
4 4
4,800 5.680 6.0 B60 30.0
3 5
3,900 4.630 10.0 100 40.0
6 6
3,600 4.220 18.0 180 58.0
5 3,000
7 3.510 13.0 170 71.0
10 2,400 2.8 12.0 C 83.0
8 320 50
7 1,700 2.0 17.0 100.0
9 510 60
$85,400
10 20 120
Example 10.1
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INFERENCE- ABC ANALYSIS EXAMPLE-1

% OF TOTAL % OF TOTAL
CLASS ITEMS VALUE QUANTITY
A 9, 8, 2 71.0 15.0
B 1, 4, 3 16.5 25.0
C 6, 5, 10, 7 12.5 60.0

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ABC ANALYSIS TABLE- EXAMPLE 2
Item Units % of Cumula- Unit Total cost % of Cumula-
Total tive % price Rs Total tive %
Rs
1 10000 10 30.40 304000 38.00
2 5000 5 15 51.20 256000 32.00 70
3 16000 16 5.50 88000 11.00
4 14000 14 45 5.14 72000 9.00 90

5 30000 30 1.70 51000 6.38

6 15000 15 1.50 22500 2.81

7 10000 10 100 0.65 6500 0.81 100

Total 100000 800000

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INFERENCE- ABC ANALYSIS EXAMPLE-2

 Assumption =1&2 ,3,4&5,6&7 fall in the same category

 1&2=item A
 3,4&5=item B
 6&7 =item C

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 Benefits of ABC Analysis
Level of Control - A –strict control, B- Moderate control & C- do not demand

Gradual Delivery of Materials- Staggering of Delivery, lower the inventory level

and blocked capital
Careful Accounting – Detailed records of goods ordered, received, issued and
goods on hand should be maintained.
Safety stock – From the economic point of view safety stock for A & B category
items should be kept min
Stock Taking – based on management policy.

Value analysis projects – For the items category A & B cost reduction analysis
to be done time to time

Layout of Stores - A good layout enables tracking and avoid misplacement of

A & B category items

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 XYZ Analysis –Selective inventory control Methods

Concept : XYZ Analysis is based on the closing stocks of inventory ( Indicating

investment in inventories.
Items are categories based on the inventory value .

X items- Items whose inventory value are high

Y items – items which have moderate value inventory stock
Z items – Items with low inventory value
The range of value of inventory is being decided by management policy
and percentage of stock items in each category.

This analysis is used to indicate the following parameters :

•Percentage value of high value items among the total inventory investment
•To take necessary action for use of inventory
•To restrict upon the procurement of high value items to bring down the
• inventory investment
•Monitor X items - on weekly basis, Y items- on by weekly basis &
Z items – on monthly or by monthly basis

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FSN ANALYSIS ( FAST, SLOW & NON MOVING CRITERIA OF ITEMS )
Concept :
This classification takes in to account the pattern of issues from stores
It is very useful when to control obsolescence
Categorization :
The categorization is based on the philosophy of consumption pattern of items

 F- This category comprises of those items which consumption by end users are very high

Example: Gaskets, nut bolts , packing, raw material etc.

 S- This category comprises of those items which consumption by end users are slow

Example: Bushes, Bearings, Seals etc.

 N- This category comprises of those items which are issued on a year basis or not moving
Example: Machine attachment, control valves, jig & fixtures, Pump shafts, etc

Benefits of FSN Analysis

Indicates the category of items of FSN

Indicates for obsolescence of items
Re-visit on replenishment of stocking philosophy

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SELECTIVE INVENTORY CONTROL - VED ANALYSIS ( VITAL, ESSENTIAL & DESIRABLE )

Concept :
In above analysis classification is based on the criticality.
Criticality means how a machine is important to production.
Items are classified into three groups.
The criticality analysis will be decided by the team members of dpet.(s)

 V- This category comprises of those items, if not available the production & safety to
be halt , causing heavy losses. Spares stock out costs causes major disruptions to many work
stations / systems.

Example: Boiler pump failure

 E- Comprises of those items, if not available the production may get affected, if the items may
not rebuilt within a time.

Example: Sewerage pump failure

 D- Comprises of those items, if not available not causes the noticeable loss of the production and
causes minor disruptions

Example: pumps used for drinking water in the plant



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SELECTIVE INVENTORY CONTROL - VED ANALYSIS ( VITAL, ESSENTIAL & DESIRABLE )

Concept understanding

Finished product

Single Mother Set of intermediate

Machine Machines
Bank of finishing
Machines 17
SELECTIVE INVENTORY CONTROL - VED ANALYSIS ( VITAL, ESSENTIAL & DESIRABLE )

Steps of a VED Analysis :

1) Analyze and identify the factors to be considered : like
 Effect on production i.e. penalty cost due to non-availability
 Delivery lead time,
 Nature of the item
 Source of supply.
 Safety of plant

2) Assign point or weight to the factors according to their importance to the company

3) Divide each factor into three categories and allocate points to each category

4) prepare categorization plan which provides the basis of classification of items into Vital
, essential & desirable .

5) Evaluate items one by one against each factor in the item.

6) place the items into V,E & D categories, depending upon the points scored by them.

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SELECTIVE INVENTORY CONTROL - VED ANALYSIS ( VITAL, ESSENTIAL & DESIRABLE )
VED Analysis factors & Weights :
Factors First category Second category Third category

Stock out cost 30 60 90

Lead time 1-4 weeks ( 30) 4-8 weeks ( 60) More than 8 weeks ( 90)

Source of supply Local ( 20) outstation ( 40) Imported quota ( 60)

Nature of Item Commercial Made to the Made to the

Std. ( 20) Supplier’s design (40) Buyer’s design (80)

Typical VED Analysis categorization plan

Point Classification

100-160 Desirable
160- 230 Essential
231-300 Vital

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 Systems -Processing units in refineries
The crude oil distillation unit
Distills the incoming crude oil into various fractions for further processing in other units
Vacuum distillation
Further distills the residue oil from the bottom of the crude oil distillation unit. The
vacuum distillation is performed at a pressure well below atmospheric pressure.
Hydrodesulphurization
Uses hydrogen to desulfurize the naphtha fraction from the crude oil distillation
or other units within the refinery.
Catalytic reforming
Converts the desulfurized naphtha molecules into higher-octane molecules to
produce reformate, which is a component of the end-product gasoline or petrol.
Alkylation
Converts isobutane and butylenes into alkylate, which is a very high-octane
component of the end-product gasoline or petrol.
Isomerization
Converts linear molecules such as normal pentane into higher-octane branched
molecules for blending into the end-product gasoline. Also used to convert linear
normal butane into iso-butane for use in the alkylation unit.
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 Systems -Processing units in refineries
Hydrodesulphurization (HDS)
Uses hydrogen to desulfurize some of the other distilled fractions from the crude oil
distillation unit (such as diesel oil).
Merox
Desulfurize LPG, kerosene or jet fuel by oxidizing undesired mercaptans to organic disulfides.
Amine gas treating,
tail gas treatment for converting hydrogen sulfide gas from the hydrotreaters into
end-product elemental sulfur.
Fluid catalytic cracking
Upgrades the heavier, higher-boiling fractions from the crude oil distillation by converting
them into lighter and lower boiling, more valuable products
Hydrocracker unit
Uses hydrogen to upgrade heavier fractions from the crude oil distillation and the
vacuum distillation units into lighter, more valuable products.
Visbreaker
upgrades heavy residual oils from the vacuum distillation unit by thermally cracking
them into lighter, more valuable reduced viscosity products.
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Process flow diagram – petroleum refining

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HML ANALYSIS ( HIGH, MEDIUM & LOW VALUE ANALYSIS )
Concept :
In above analysis, price criteria is used. The items under analysis are classified
into three groups.
The price criteria will be decided by management
 H- All items unit price more than worth Rs 10,000/-

 M- All items unit price between Rs 5001/- to 10,000/-

 L- All items unit price upto worth Rs 5000/-

Benefits of HML Analysis

Storage point of view :
Control of consumption:
Frequency of stock verification:
Buying Strategy:
Authority delegation:

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SDE ANALYSIS ( SCARE, DIFFICULT, EASY OF AVAILABILITY OF ITEMS )
Concept :
This classification emphasis to refer for lead time factor of items delivery
Purpose:
The information so collected is then used for finalising purchasing strategy

 S- This category includes items of which requires long delivery say a year or more

Example: Filter elements ( Imported for DG Set), imported spare parts

 D- This category includes those items which are available indigenously, however not easy to
procure
Example: Raw material requires legal formality ( Naphtha gas) , proprietary items

 E- This category includes those items which are easily available are not proprietary items

Example: Bearing

Benefits of SDE Analysis
Aspect of responsibility of procurement dept.
Buying strategy for items
Indicate reorder point of items procurement, so that stock out condition not occur

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SUMMARY -SELECTIVE INVENTORY CONTROL
Title Basis Main Use

ABC ( always better Annual Consumption Value To control raw material , WIP & other
Control) of item component in normal course of business

XYZ Stores items inventory value To know the total inventory stock
To control on X items for procurement &
consumption

FSN ( fast ,slow & Stores inventory issuance & To control the obselcense of items
non moving items) use

VED ( Vital, Criticality of component & To determine the stocking level of the spare
Essential & /or material w.r.to production parts
Desirable)
HML ( High ,Medium Unit Price of Material Mainly to control purchase
& Low)
SDE ( Scare, Purchasing problem in Lead time analysis & for devising purchasing
Difficult & easy to regards to availability strategies
obtain)

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 New Concept -MUSIC Analysis – Multi unit Selective inventory control Methods

Concept : MUSIC as two or three dimensional approach considered

finance
consumption
Lead time

In application, the approach of MUSIC we considered two selective methods

as combination and analysis is based on above dimensions.

MUSIC analysis helps the management to decide the materials policy and what
the service levels are expected to see that no difficulty is faced.

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 MUSIC Analysis – Multi unit Selective inventory control Methods

Usually, XYZ analysis is used in conjunction with ABC analysis

Example – ABC with XYZ analysis

Decision Table
A B C

X Reduce stock to Z Convert to Y Category Dispose of surplus

Y Reduce stock to Z Good control Tighten control

Z Good control OK Situation Monitor semi annually Good control

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 MUSIC Analysis ( VED & ABC)
• Based on critical value & shortage cost of an item
–It is a subjective analysis.
•Items are classified into:
Vital:
•Shortage cannot be tolerated.
Essential:
•Shortage can be tolerated for a short period.
Desirable:
Shortage will not adversely affect, but may be using more resources.
These must be strictly Scrutinized

V E D ITEM COST

A AV AE AD CATEGORY 1 10 70%

B BV BE BD CATEGORY 2 20 20%

C CV CE CD CATEGORY 3 70 10%

CATEGORY 1 - NEEDS CLOSE MONITORING & CONTROL

CATEGORY 2 - MODERATE CONTROL.
CATEGORY 3 - NO NEED FOR CONTROL
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Inventory ( spare-parts level fixation) – based on VED Analysis

Insurance
spares

Sub- Durable
assemblies Spare-parts spares
classification
based on
types

Hard ware Consumable's

Spares

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 Inventory ( spare-parts level fixation) – based on VED Analysis
Classification of Spare parts – Criticalitywise

1.Vital (Operation / Safety affected in case of non-availability)

2.Essential (Production not affected but may get affected)
3.Desirable (No immediate loss of production)
Stock level fixation philosophy for Rotary Equipments / Wear and Tear related failures

Insurance spares: Based on cost economic justification.

Durable Spares:
Minimum stock (safety stock) = k x (Total lead-time consumption for all Installed quantities).

Total lead-time consumption For all installed quantities

#  Annual consumption x lead-time x installed quantities.

k = 1.5 for vital spares

= 1 for essential spares
= 1 for desirable spares

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 Inventory ( spare-parts level fixation) – based on VED Analysis

Stock level fixation philosophy for Rotary Equipments / Wear and Tear related failures

# Installed quantity means the quantity of spares installed in the running

equipments. It does not include the quantities of spares of the stand-by equipments.
For example if there are 3 pumps out of which 2 for normal running and 1 as stand-
by. Then the total installed quantity will be the spares installed in the 2 pumps.
Reorder Quantity (ROQ) = Total lead-time consumption for all installed quantities.
Reorder level (ROL) = Minimum stock (safety stock) + total lead- time
consumption for all installed quantities.

For, fractions wherever arising during calculation the following practice for
rounding off shall be adopted.
For safety stock (minimum stock) above 0.5 rounded off to higher integer
Below or equal to 0.5 rounded off to 0
For lead-time consumption all figures below 1 will be rounded off to 1, fractions
above 1 can be considered to next number in case it is more than 0.5.

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 Inventory ( spare-parts level fixation) – based on VED Analysis
Stock level fixation philosophy for Rotary Equipments / Wear and Tear related failures
Table 1: Estimated life-3 years, lead time-6 months

Installed Vital (k=1.5) Essential and Desirable (k=1)

quantity
Min ROL ROQ Max Min ROL ROQ Max
1 0.61 1 0.78 1 0.17 1 2 0.41 0 0.57 0 0.17 1 1
2 0.87 1 1.2 1 0.33 1 2 0.58 1 0.91 1 0.33 1 2
3 1.06 1 1.56 2 0.50 1 3 0.71 1 1.21 1 0.50 1 2
4 1.22 1 1.89 2 0.67 1 3 0.82 1 1.48 1 0.67 1 2
5 1.37 1 2.2 2 0.83 1 3 0.91 1 1.75 2 0.83 1 3
6 1.50 1 2.5 2 1.00 1 3 1.00 1 2 2 1.00 1 3
7 1.62 2 2.79 3 1.17 1 4 1.08 1 2.25 2 1.17 1 3
8 1.73 2 3.07 3 1.33 1 4 1.15 1 2.49 2 1.33 1 3
9 1.84 2 3.34 3 1.50 1 4 1.22 1 2.72 3 1.50 1 4
10 1.94 2 3.6 4 1.67 2 6 1.29 1 2.96 3 1.67 2 5

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 Inventory ( spare-parts level fixation) – based on VED Analysis
Stock level fixation philosophy for Rotary Equipments / Wear and Tear related failures

CONSUMABLE SPARES:

The lead- time for consumable spare may be taken as 4 months. As these are low cost spares and
required to be replaced every time the equipment is taken under maintenance, the quantities may be
fixed on the basis of minimum quantity arrived from the two formulas given below:

FORMULA A :

Minimum stock :25% of the installed quantity

Reorder quantity (ROQ) :50% of the installed quantity
Reorder level (ROL) : ROQ + Minimum stock
Maximum Stock : ROQ + ROL
FORMULA B:
Minimum stock : 1xn, whichever is less
Reorder quantity (ROQ) : 1xn, whichever is less
Reorder level : ROQ + Minimum Stock
Maximum stock : ROL + ROQ
Where n = Installed quantity as per the above mentioned definition

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 Inventory ( spare-parts level fixation) – based on VED Analysis
Stock level fixation philosophy for Rotary Equipments / Wear and Tear related failures

An example
Note 1: The above methodology is applicable to fix level before Plant Operation experience is
available. (i.e. during Project stage)
2. Consumable Spares level needs to be re fixed based on consumption pattern after 2
years of Operating Experience.

Formula A Formula B Effective

Installed RO
Quantity Min Q ROL Max Min ROQ ROL Max Min ROQ ROL Max
1 0.3 0.5 0.8 1.3 1.0 1.0 2.0 3.0 0 1 1 1
2 0.5 1.0 1.5 2.5 1.4 1.4 2.8 4.2 1 1 2 3
3 0.8 1.5 2.3 3.8 1.7 1.7 3.5 5.2 1 2 2 4
4 1.0 2.0 3.0 5.0 2.0 2.0 4.0 6.0 1 2 3 5
5 1.3 2.5 3.8 6.3 2.2 2.2 4.5 6.7 1 2 4 6
6 1.5 3.0 4.5 7.5 2.4 2.4 4.9 7.3 2 2 5 7
7 1.8 3.5 5.3 8.8 2.6 2.6 5.3 7.9 2 3 5 8
8 2.0 4.0 6.0 10.0 2.8 2.8 5.7 8.5 2 3 6 8
9 2.3 4.5 6.8 11.3 3.0 3.0 6.0 9.0 2 3 6 9
10 2.5 5.0 7.5 12.5 3.2 3.2 6.3 9.5 3 3 6 9
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 Inventory ( spare-parts level fixation) – based on VED Analysis
Stock level fixation philosophy for Rotary Equipments / Wear and Tear related failures

Hardware Spares
For Special hardware’s of pumps and compressors, which are not available of the shelf,
the levels may be fixed using the Durable Spares philosophy in case of essential and
desirable machines.
For Critical machines the min / max stock should be 15% / 30% of the installed quantity.

Sub-assemblies
For sub-assemblies, which are not available of the shelf, the levels may be fixed
using the Durable Spares philosophy in case of essential and desirable
machines.
For Critical machines case specific strategies to be derived based on cost
economic considerations.

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 Spare Part and Interchangeability Record
Concept : In the plant , we are using the equipment / sub assemblies of similar type
with different Functional service
e.g. : Centrifugal pumps for petroleum product transfer
Mechanical Seal as sub assemblies
Gearbox for cooling towers
Exchangers
Towers & packing's

It is essential to review their spare parts for the interchangeability and quantity
to keep as spares while considering key Parameters :
Same Manufacturer
Models
Type / Category
Functional service
This will provide the benefits of
Cost economics
reducing inventory
Maintenance personnel's awareness for spares

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Spare Part and Interchangeability Record

Display and discussion on Excel sheet

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 Case Studies
•Inventory control : Impeller interchangeability
•Critical Evaluation : Conveyor belt of Fertilizer plant

•Project Purchase: Project order- Spare parts complete details

•Product development: Filter element -25 micron particle size

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