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Material Criticality Analysis or Inventory Analysis

PiLog would perform the material criticality or Inventory Analysis in order to determine the criticality, consumption value, consumption rate, stock value, lead time, price of single unit & frequency with which it is used by the plants during the production process

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.

This module allows the users to easily view inventory movement, usage and trends. Users can analyse inventory sales over a specified time frame and make decisions on how to best adjust item resource planning values based on sales averages and months availability

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.

    The following are the various methods to control the inventory process:

  • ABC Analysis - Based on consumption value per year

  • FMS Analysis - Based on consumption rate

  • VED Analysis - Based on criticality & impact

  • XYZ Analysis - Based on stock value accumulation

  • HML Analysis - Based on unit price of the material

  • SDE Analysis - Based on lead time & availability of items

    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

graph-abc-analysis

    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

graph-fms-analysis

    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

graph-ved-analysis

    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

graph-xyz-analysis

    Purpose of HML Analysis (Based on Unit Cost of the Material):

    HML analysis classifies the materials based on their unit prices. The main objective of this analysis is to minimize the inventory cost such as labour cost, material cost etc.

    This analysis is similar to ABC analysis the difference that instant “usage value, price” criteria is used. It is based on Pareto principle or the 80/20 rule. It is used to keep control over consumption at departmental level for deciding the frequency of physical verification

    In this analysis cut-off-lines are then fixed by the management of the organization to classify the inventory items. The cut-off-lines are based on unit cost such as

    H High Cost These are the costly item and are generally 10-15% of total item More than 10,000 Rs.
    M Medium Cost These items are low cost item as compared to H class items, this are generally 20-25% of total item 1000-10,000 Rs.
    L Low Cost These items are low class item and generally 60-70% of total items Less than 1000 Rs.

    Steps Performed on HML Analysis:

  • Prepare the list of items and calculate their unit cost, annual demand and annual usage

  • Arrange items in the decreasing order of their unit cost

  • Calculate percentage of unit cost, cumulative of unit cost and then categories the inventory item

  • The cut off lines are then fixed by the organization for deciding three categories

  • Plot the graph on the basis of cumulative of unit cost and then categories the inventory items

    Purpose of SDE Analysis (Based on Lead Time & Availability of Items):

    It is very useful in the context of scarcity of supply

    SDE analysis classifies inventory based on how freely available an item or scarce an item is, or the length of its lead time. This is how the inventory is classified

    It attempts to classify items on the basis of its availability or procurement such as 

    a) Its non-availability

    b) How scarce it is?

    c) Does it have a longer lead time?

    d) Where is the geographical location of the suppliers of the item, i.e. close by, or very far away?

    e) How reliable (or unreliable), after the suppliers of the item, etc.?

    S Scarce Items which are imported and require longer lead time ie., more than 6 months (180+ Days) Longer Lead Time
    D Difficult Items which require more than a fortnight to be available, but less than 6 months’ lead time (between 1 to 180 Days) Long Lead Time
    E Easy to acquire Items which are easily available in less than a fortnight ( Reasonable Lead Time
  • The products can be classified based on the value of importance

  • Strict control of materials is required

  • Minimum storage cost of the material

  • Time saving

  • The system categorizes the items based on how frequently the spare parts are issued or how frequently they are used

  • Reducing the handling efforts

  • To keep the investment on inventories to the minimum

  • To minimize the idle time by avoiding stock outs and shortages

  • To control obsolescence of raw materials, components, tools, spare parts, etc.

  • To determine the criticality of the spare

  • It is useful for monitoring and control of stores and spares inventory

  • On the basis of unit price, Materials management may delegate the authority to various levels of purchase officers to authorize and sign purchase orders

  • Improved efficiency and lower margins

  • Promote overall productivity with significantly shortened work cycles

  • Eliminate most inter-department paperwork, taking inventory, and receiving to the warehouse

  • Reconcile missing assets onsite with an easy-to-use visual contrast of collected and original asset data based on tag number, serial number, or asset ID

  • Save time and improve accuracy of data

  • Increasing virtualization

  • Eliminates excel work which are stuck with various formulae to manage inventory

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