Meaning of VED Analysis
V.E.D analysis is an inventory management technique that classifies inventory based on its functional importance. It categorizes stock under three main headings based on its significance and necessity for an organization’s production or other activities:
- V – Vital
- E – Essential
- D – Desirable
V – Vital Category
As the name suggests, the “Vital” category includes inventory crucial for production or any other process within an organization. A shortage of items in this category can severely disrupt the smooth functioning of operations. Therefore, constant monitoring, evaluation, and replenishment are undertaken for such stock. If such inventory is unavailable, the entire production chain might halt. Thus, ordering such inventory should be done well in advance. Management must ensure the continuous availability of items under the “Vital” category through proper checks.
E – Essential Category
The “Essential” category includes inventory that is very important for the organization. While shortages in this category can disrupt production or other processes, the resulting damage may be temporary, or it might be possible to repair the stock item or part. Management must also ensure the optimal availability and maintenance of inventory under the “Essential” category. Shortages or delays should not arise due to unavailability in this category.
D – Desirable Category
The “Desirable” category is the least critical among the three, and shortages may cause minor disruptions in production or other processes. Moreover, such shortages can often be resolved in a short time.
Importance of VED Analysis
Maintaining the optimal level of inventory is crucial for any organization. Inventory maintenance has its costs, and VED analysis helps divide inventory into three parts to assist managerial decisions about inventory maintenance. There are four types of costs involved in maintaining stock:
- Item Cost
This refers to the cost or price of the inventory item, representing the actual purchase price of the stock. - Ordering/Set-Up Cost
Procuring inventory involves costs such as transportation charges, packaging charges, etc. - Holding Costs
After purchasing inventory items, additional costs are incurred. These relate to storage, insurance premiums, labor costs for handling the stock, and potential damage to the stock. - Stock-Out Cost
These costs arise when an inventory item runs out of stock, including losses due to halted production because of a missing spare part. Additionally, delays in product sales or unavailability of the product itself contribute to stock-out costs.
VED analysis is a significant tool for understanding and classifying inventory based on its importance. Through this, management can optimize costs by investing more in critical and essential categories of stock while reducing investment in the desirable category.
Summary
For any organization, resources are always scarce, and optimal utilization of available resources is the key to success. Since inventory maintenance costs are high, they should be managed effectively. Scientific methods like VED analysis help maintain an optimal stock level without risking shortages of critical parts, spares, or products.
