## Inventory Classification Systems
Inventory classification helps businesses apply differentiated control to different categories of materials based on value, usage frequency, or criticality.
### ABC Analysis (Value-Based)
Classifies inventory by annual consumption value (unit cost × annual usage):
| Category | % of Items | % of Value | Control Level |
|---|---|---|---|
| A | ~10% | ~70% | Tight / close monitoring |
| B | ~20% | ~20% | Moderate |
| C | ~70% | ~10% | Loose / bulk ordering |
Advantages of ABC:
- Focuses management attention where money is tied up (A items)
- Selective control reduces workload on routine C items
- Optimises reorder levels and ordering frequency
- Systematises processes; routine tasks can be delegated for C items
### FSN Analysis (Usage Frequency–Based)
| Category | Meaning | Storage & Review |
|---|---|---|
| Fast Moving | High usage frequency | Near issue point; regular reorder review |
| Slow Moving | Low usage frequency | Farther away; periodic review for obsolescence |
| Non-Moving | Rare/zero usage | Earmarked for disposal; provision for loss may be made |
### VED Analysis (Criticality-Based)
| Category | Meaning | Treatment |
|---|---|---|
| Vital | Unavailability stops production | Strict control, re-order levels maintained |
| Essential | Unavailability reduces efficiency | Second priority, periodic review |
| Desirable | Optional; minimal impact | Third priority |
Use case: VED is important for spare parts and components where stockout has asymmetric consequences.
### HML Analysis (Unit Cost–Based)
| Category | Unit Cost | Control Priority |
|---|---|---|
| High | Significant | Highest |
| Medium | Moderate | Intermediate |
| Low | Low | Lowest |
> Exam tip: ABC = value; FSN = movement; VED = criticality; HML = unit price. These can be combined (e.g., an item that is A+V+H gets maximum control).