ABC Analysis or Always Better Control Analysis:
ABC Analysis a matter of common experience that in all organizations some items of inventories have a much higher annual usage (i.e. the value of total annual consumption of those items) than others. Therefore more attention should be paid to such items as compared to those whose annual consumption value is very low. It will not be wise to pay equal attention to all type of items of the inventory.
It is ABC analysis that separates inventories into A, B and C items according to their annual consumption value, so that we may pay greater attention to those items that fall in category A (which have got the maximum total annual consumption) and lesser to category B items and still lesser to category C items.
Thus ABC analysis gives rise to selective inventory control in which maximum attention can be given to A items, a fair amount to B items while the attention necessary for C items can be reduced to routine procedure. It is found that in most organizations about 10 % (or even less) items of the about 20 % of the items of inventory account for 15 to 25 % of total annual consumption cost, while the remaining 70 % of the items of inventory cover only 5 to 10 % of that cost.
The first category items (which are about 10% of the total items of the inventory) which though less in number but are of high annual consumption value are called A items. The medium consumption value items (which are about 20 % of the total items of inventory) are B items while the large number of items (which are about 70 % of the total number of items of inventory) whose annual consumption value is very low are C items.
VED Analysis or Vital Essential Desirable Analysis:
VED analysis is specially applied in the case of spare parts inventory, medical stores, and the like. In VED analysis, there are three classes of inventories, such as Vital, Essential and Desirable.
‘Vital’ items are those, the absence of which even for a very short period is likely to stop production or work, i.e. life saving drugs.
‘Essential’ items are those the absence of which can not be tolerated for more than a day or so because without such items temporary losses of production or dislocation of production occurs.
‘Desirable’ items are those which are necessary but do not cause any immediate effect on production.
Thus, with the help of VED analysis, we can categorize all the items of the inventory into three categories, viz. , vital essential and desirable and maintain our inventory in the light of the same. It adds to our confidence because we know that vital and essential items are there in our stock and production is not likely to be affected adversely.