VED Analysis
Meaning of VED Analysis
VED analysis is an inventory management technique that classifies inventory based on its functional importance. It classifies stock under three heads based on its importance, and requirement for an organization for production or any of its other activities.
V – Vital
E – Essential
D – Desirable
V – Vital Category
As the name suggests, the “vital” category includes inventory, which is needed for production or any other process in an organization. Shortage of items under this category can seriously impede the proper functioning of the operations. Hence, there is constant scrutiny, valuation, and replenishment for such stocks. If no such inventory is available, the entire production chain may be shut down. Hence, such inventory should be ordered in advance. Proper checks should be done by the management to ensure the continued availability of items under the “critical” category.
- E – Essential Category
The essential category includes inventory, which is important. These too, are very important for any organization as they can stop production or hinder any other process. But due to their unavailability, the damage may be temporary, or it may be possible to repair the stock item or part. Management should also ensure optimum availability and maintenance of inventory under the “essential” category. There should not be any interruption or delay due to the non-availability of inventory under this category.
- D – Desirable Category
The Desirable category of inventory is the least important of the three, and their non-availability may result in minor interruptions in production or other processes. Moreover, the such shortfall can be easily filled in less time.
Importance of VED Analysis
Maintaining an optimum level of inventory is of utmost importance for any organization. Maintaining inventory has its own cost, and therefore, this analysis divides inventory into three parts to help with managerial decisions on inventory maintenance. There are four types of costs for maintaining stock which are:
- Item Cost
The cost or price of the inventory item is Item Cost. This is the actual purchase price of holding the stock.
- Order / Set-up Cost
There are certain costs involved in the purchase of inventory. These may include transportation charges, packing charges, etc.
- Holding Cost
After the purchase of an inventory item, there are some costs as well. These may be related to storage, insurance charges for stock or inventory, labour costs associated with handling the stock, etc. In addition, it includes any loss of stock.
- Stock out cost
These costs are the result of an inventory item running out of stock. This includes loss of production due to a spare part being out of stock. In addition, this may delay the sale of the product. Also, the product itself may be out of stock. Such losses are a part of the stock-out cost.
VED analysis is an important tool to understand and classify inventory according to its importance. Due to this, management can optimize costs by investing more in essential categories of stock and investing less in the desirable category of inventory.
Resources are always scarce for any organization, and thus making the best use of available resources is the key to success. Since the costs associated with maintaining inventory are high, these costs must be applied effectively.
Scientific methods such as VED analysis helps in maintaining an optimum stock level without posing the risk of shortage or non-availability of required parts, parts, or products.