Running a successful business demands effective inventory management. This involves keeping low levels of inventories by providing the right products at the appropriate time and reducing the associated costs. These analyses are carried out through different techniques of analysis and categorization. One such analysis is employed in every industry that best fits them.
ABC Analysis And VED Analysis As Two Inventory Management Techniques. Both methods proved valuable; however, these differ with regard to their objectives and categories.
Here, we are going to discuss the advantages and disadvantages of ABC and VED analysis as well as give some real-world cases illustrating the application of these methods depending on the industry.
Let’s first know the basic definitions of both analyses,
As indicated by ABC analysis otherwise known as Pareto analysis, all inventory items should be divided depending on their significance. It classifies items into three categories: High-value items with high usage/contribution – comprise category ‘A’, moderates – category ‘B’ and low priced – comprise category ‘C’.
Here is an example of chicken food production raw materials,
Get Google Sheet file of above example : Link
Advantages of ABC Analysis:
- Marks the vital stock of the organization.
- Helps in the deployment of more focus on urgent needs.
- Closely monitors high-value items thus reduces inventory holding costs.
- Ensures that optimal stock levels are maintained for every item category so as to optimize inventory levels.
Disadvantages of ABC Analysis:
- The value is oriented while ignoring the usage rate, only on its value.
- Large inventories may prove time-consuming and difficult to implement.
- Presupposes an inverse relation between the cost of goods sold and the price of items; however, this does not always stand.
Using the ABC method of categorization, high-value, popularly consumed or yielding products are identified for close attention, efficient use and cost minimization.
An inventory classification method, VED analysis classifies inventory according to its criticality and availability requirements. VED equals to Vital, Essential, and Desirable. Stockouts of vital items have serious implications on the organizations’ operations and survival as they depend heavily on these essentials. There are essentials which are essential though not necessarily urgent while desirables offer more comfort and luxuries.
Here is an example of medical store inventory,
Get Google Sheet file of above example : Link
VED Analysis enables critical item management, optimum resource allocation, and risk minimization; this is an approach that groups items into categories depending on criticality and availability demand.
Advantages of VED Analysis:
- Identifies critical items necessary for the operations of a corporation.
- Allocates attention and resources towards the vital activities.
- Eliminating stock-outs on essential products.
- Ensures adequate stocks of each items category which minimize inventory overhead costs.
Disadvantages of VED Analysis:
- Takes no mind with the worth of an item; just on its critical nature alone!
- It can take a lot of time and resources to put it into implementation in large inventory settings.
- It assumes that the two are in inverse relationship, which is not always valid.
Difference Between ABC and VED Analysis
Two methods of classifying inventory items and optimising inventory management include ABC analysis and VED analysis. While both tools are useful for prioritizing inventory management efforts, there are some key differences between the two:
|Criteria||ABC Analysis||VED Analysis|
|Focus||Value and usage frequency||Criticality and urgency|
|Categorization||Classifies items into three groups: A, B, C||Classifies items into three groups: V, E, D|
|Inventory||Based on item value and usage frequency||Based on item criticality and urgency|
|Decision-making||Used for ordering and stocking decisions||Used for prioritization and availability checks|
|Advantages||Effective resource allocation, optimized inventory management, improved customer service||Priority-based management, cost optimization, risk mitigation|
|Disadvantages||Overlooks factors beyond value or usage, relies on historical data, complex implementation||Simplified classification, subjective determination of criticality, limited consideration of dynamic factors|
|Example||High-value items such as electronics||Life-saving drugs and medical equipment|
Detailed comparison of ABC and VED analysis as follows,
- ABC analysis mainly tries to sort the inventory in terms of its value and quantity. However, VED analysis focuses on vitality or criticality as it pertains to availability rather than just consumption.
- ABC analysis, which plays significant roles in managing inventory, optimizing resources, and controlling expenses in different industries, is well known all over the world. The VED analysis is applicable in industries where there are issues of access and criticality of goods that may be relevant for healthcare, manufacturing, or emergency services.
- The ABC analysis helps in risk management as it pinpoints costly goods that need close monitoring and the provision of essential tools and materials. In contrast, VED analysis is directed towards decreasing risks emanating from the presence and use of critical items.
- Another method of ordering in stocks is ABC analysis, where inventory items are categorized according to their value and frequency of use. However, other scholars have argued that these two measures do not measure similar concepts and hence cannot be compared.
- ABC analysis divides items into three categories: Can be classified according to their scarcity value into three categories of A, B, and C. But, in VED analysis there are three categories: vital, essential, and desirable.
- ABC analysis does not seek to cut costs through reduced inventory levels but to manage inventory levels and reduce costs. On the other hand, VED analysis helps in prioritizing inventory management efforts toward cost-effective allocation of resources.
- ABC analysis is much more simplistic than VED analysis because it only comprises three main segments; high value / high use, high value / low use as well and low value / high frequency. However, with VED analysis, there are specific categories based on the criticality of items in question in the company.
- Unlike ABC, VED analysis is designed to meet particular objectives of a business and fits its specific tasks, but at the same time is more inflexible, since it applies fixed criteria (consumption’s annual value).
While both ABC and VED analysis would have some value in different industries, it will largely depend on the specific characteristics of each particular industry. In contrast, ABC analysis is preferable in big inventory operations with substantial costs; VED analysis seems more appropriate for companies having small inventories or need of intricate inventory control.
ABC vs VED analysis, which one is better?
One might argue that one tool is “better” than the other, but ABC analysis and VED analysis have specific pros and cons that can make them more or less appropriate for different businesses’ objectives and strategies.
ABC analysis can be of real help when it comes to optimization of inventory levels and reduction of carrying costs especially for industries where there are big stocks and high carrying costs. It’s pretty easy to use, offers general view on inventory items according to their annual consumption cost.
VED analysis provides an essential tool in prioritizing inventory management efforts, allocation of the scarce resources especially where inventories are small, or operations too complex for inventory management. While it is more specific than ABC analysis, it can be tailored according to particular needs or objectives of the company.
Additional Resources & Attachments,
- PDF Slideshow : ABC vs. VED Analysis: Key Differences (slideshare.net)
Ultimately, the decision of which tool to use will depend on the specific needs and goals of the business, as well as the characteristics of its industry and inventory. It may be useful to consider both tools and determine which one is more suitable based on the business’s specific needs.