Inventory Control Techniques in Operations Management
Inventory control techniques explained: ABC analysis with a worked ten-item example, VED, FSN, HML and SDE, the ABC-VED matrix, EOQ, reorder point, safety stock, perpetual inventory and stock verification.
Updated 11 min read
Inventory control techniques are the specific methods an organisation uses to keep stock under control: to decide which items deserve close attention, how much to order, when to order and how to check that records match reality. They turn the broad goal of inventory management, the right stock at minimum cost, into practical rules for thousands of individual items.
They matter because items are not equally important. A store holding 5,000 items will have some that are very costly and some that are cheap, some that move fast and some that hardly move, some that halt production if missing and some that nobody would miss for a week. Treating them all the same wastes management time on trivial items and leaves critical ones under-controlled. Techniques such as ABC, VED, FSN, EOQ and the reorder point solve this by matching the level of control to the item.
Uncontrolled stock creates familiar problems: too much stock raises carrying cost, too little causes shortages, important items run out, money is blocked in unnecessary items, storage space is wasted and records become difficult to manage.
Control means deciding which items need strict, moderate or simple control, when to reorder, how much to reorder and which items are critical to operations. Different techniques answer different parts of that question.
ABC analysis is a selective control technique that classifies items into A, B and C classes according to their annual consumption value (annual usage quantity multiplied by unit cost). It applies the Pareto principle: a small number of items usually accounts for most of the money. The idea was popularised in industry by H. F. Dickie at General Electric. Typical, not fixed, proportions are:
Share of P1: 20,00,0007,00,000×100=35%. Proceeding the same way and cumulating gives the table above. The result:
Class A = P1, P2: 2 items (20% of items) and ₹12,00,000 (60% of value).
Class B = P3, P4, P5: 3 items (30% of items) and ₹6,00,000 (30% of value).
Class C = P6 to P10: 5 items (50% of items) and ₹2,00,000 (10% of value).
ABC classes for the worked example: two items carry 60% of the money.
Management should therefore watch motors and control panels most closely, for example with EOQ-based ordering, weekly review and tight stock records, while bolts and cable ties can be bought in bulk and checked occasionally.
VED classifies items by criticality, and is widely used for spare parts, maintenance stores and hospital medicines.
Vital: operations stop completely if these are unavailable (oxygen cylinders in a hospital, a critical machine spare). They must never be out of stock.
Essential: important, but a short absence can be managed for a limited time.
Desirable: useful but not immediately critical.
Because ABC asks "which items cost more?" and VED asks "which items are more critical?", many firms use both together in a nine-cell matrix. An item can be low cost but vital, and such an item still needs top-priority availability.
ABC-VED matrix: Category I items get the tightest control, Category III the simplest.
FSN classifies items by rate of movement out of stores, usually judged by issue frequency or the time since the last issue.
Fast moving: issued frequently; need regular replenishment.
Slow moving: issued occasionally; need periodic review.
Non-moving: not issued for a long time; candidates for disposal as obsolete or surplus stock.
FSN helps identify dead stock, free storage space and release money locked in idle items. ABC focuses on money importance, FSN on movement, so an item may be low value but fast moving, or high value but slow moving.
HML classifies items as High, Medium or Low cost by unit price. It helps management review expensive units carefully and control purchase decisions. It differs from ABC, which uses annual usage value rather than unit price: in the example above the control panel has the highest unit price (H), while bearings are only medium in price but still class B because of their volume.
EOQ is the order size that minimises the total of annual ordering cost and carrying cost. Ordering too often raises ordering cost; ordering too much at once raises storage cost. The formula, due to F. W. Harris, is:
EOQ=H2DS
For the bearings (P3) in the example, suppose ordering cost S is ₹150 per order and carrying cost is 20% of the ₹60 unit cost, so H is ₹12 per bearing per year. With D=4,000:
Safety stock is extra inventory kept as a safety margin against sudden demand increases, supplier delay, longer production times or urgent orders. Companies may also hold it in distribution centres to prepare for future demand. It reduces the risk of stock-out.
The reorder point tells the store when to order, before stock reaches zero:
ROP=(daily demand×lead time)+safety stock
If the workshop uses 16 bearings a day (4,000 over 250 working days), the lead time is 6 days and safety stock is 30, then:
ROP=(16×6)+30=96+30=126 bearings
So whenever bearing stock falls to 126, an order for about 316 bearings is placed. The reorder point prevents shortage, makes ordering systematic, matches stock to lead time and reduces emergency purchases.
A simple physical version of the reorder point, common for C items: stock is kept in two bins, and when the first bin is empty the second (holding reorder-level stock) is opened and a new order is placed.
Stock records (bin cards and stores ledger, or software) are updated every time material is received or issued, so the balance is always known. It reduces record errors, supports stock control, improves decisions and detects shortages early.
Physical checking of whether actual stock matches recorded stock, either at year-end or continuously on a rotating basis (continuous stock-taking). It detects loss, damage, theft, recording errors and obsolete materials.
Classification is useful because costly items need financial control, critical items need availability control, slow-moving items need disposal review and hard-to-buy items need advance planning. Real organisations therefore combine methods:
ABC for value;
VED for criticality;
FSN for movement;
EOQ for order size;
reorder point for timing.
A hospital storing oxygen cylinders, injections, cotton, gloves and expensive imported equipment may use VED for critical medical items, ABC for costly items and reorder points for daily consumables. A factory may use ABC for spare parts; a retail store may use EOQ for regular stock ordering. These techniques apply in factories, hospitals, schools, retail stores, warehouses and maintenance departments.
