VED Analysis of Inventory Management with Example

Inventory analysis aims to strike the perfect balance between having sufficient inventory to meet customer demands and avoiding excessive inventory that can tie up capital and lead to increased carrying costs. In this pursuit, various techniques are used, and one such technique is VED analysis.

VED analysis of inventory management stands for Vital (V), Essential (E), and Desirable (D).

In this article, we will explore what VED analysis is, its significance, and provide an example to illustrate its practical application.

What is VED analysis?

VED analysis is an inventory management technique that classifies items into three categories: Vital, Essential, and Desirable. This classification is based on the items’ criticality and impact on business operations. Using the first letter of these categories is shortly called VED analysis and so ved analysis full form is vital, essential and desirable. Let’s take a closer look at each category.

• Vital Items : Vital items are those that are crucial for the organization’s operations. These items have a significant impact on production, customer service, or safety. Any shortage or unavailability of vital items can have severe consequences. Examples of vital items include specialized machinery, critical raw materials, and essential components.
• Essential Items : Essential items are important for smooth operations but may have substitutes or alternative options available. Their non-availability can lead to inconvenience or delays but does not cause critical issues. Examples of essential items include common raw materials, standard components, and regular office supplies.
• Desirable Items : Desirable items are of lesser importance compared to vital and essential items. Their non-availability may not cause significant disruptions or delays. These items are often related to aesthetics or additional features. Examples of desirable items include premium packaging materials, promotional items, and non-essential office decorations.

The VED analysis can help a business prioritize its inventory management efforts and allocate resources appropriately.

For example, a business may want to invest more time and resources into managing its vital items while keeping a lower safety stock for essential and desirable items. This can help the business optimize its inventory levels and minimize carrying costs.

Advantages and disadvantages of VED analysis

VED analysis offers several advantages in inventory management:

• By categorizing items, businesses can allocate resources based on their criticality, ensuring that vital items are always available.
• Focusing on vital and essential items helps prevent excess stock of non-critical items, reducing holding costs.
• VED analysis helps identify high-risk items and allows businesses to take appropriate measures to manage potential disruptions.

While VED analysis is a valuable tool, it does have some disadvantages:

• The classification into three categories may oversimplify the complexity of inventory management in some cases.
• Item criticality may change over time due to market dynamics, technological advancements, or changes in customer preferences.
• VED analysis focuses primarily on criticality and may not account for factors such as cost, demand variability, or lead times.

How to do VED analysis

Here are simple explained steps to conduct a VED analysis,

Step-1: Identify inventory items

Identify the inventory items that your business holds: This may include raw materials, finished goods, spare parts, and consumables. Mostly people use excel documents to account such inventory related data.

Step-2: Classify items based on criticality

Classify each item based on its importance or value to the business: To do this, consider the following factors:

• Usage rate: How frequently is the item used or consumed?
• Lead time: How long does it take to obtain the item if it is out of stock?
• Availability: Is the item readily available or is it difficult to obtain?
• Cost: How much does the item cost to purchase or produce?

Based on these factors, classify each item as vital, essential, or desirable. You can just add column in your excel file to type category name in front of each item. You can also use only V,E,D letters to do this. Refer following screnshot.

Step-3: Review and adjust your inventory management strategies

Based on the VED analysis, review and adjust your inventory management strategies to ensure that you are allocating resources appropriately. For example, you may want to invest more time and resources into managing your vital items, while keeping a lower level of safety stock for essential and desirable items.

Step-4: Monitor and review regularly

Regularly review and update your VED analysis to ensure that it accurately reflects the current importance or value of each inventory item to your business. This can help you stay on top of changes in your business and adjust your inventory management strategies as needed.

Applications of VED analysis

VED analysis of inventory is a method used to classify items based on their importance and demand. It helps prioritize inventory management efforts. Here are its applications:

1. It helps prioritize items based on their criticality to avoid disruptions.
2. It identifies and manages the risk of stockouts for vital items.
3. It optimizes inventory investment by allocating resources efficiently.
4. It improves forecasts by understanding demand characteristics.
5. It guides procurement decisions based on item criticality.
6. It supports efficient storage and retrieval systems based on item importance.

VED analysis is used in industries like healthcare, manufacturing, and distribution. It is performed periodically or when there are changes in inventory requirements.

Overall, the VED analysis can be a valuable tool for businesses that want to optimize their inventory management and make informed decisions about how to allocate their resources.

VED analysis example in pharmacy

Here is an example of how a pharmacy might use VED analysis to classify its inventory items:

Get above example Google sheet file: Link

Here is how I have categorized and analyzed inventory items for specific V, E and D categories.

Vital items:

• Prescription medications: These are essential to the operation of the pharmacy and must be kept in stock at all times to fulfill customer orders.
• Over-the-counter medications: These are important to the business and may have high usage rates or long lead times.

Such as Paracetamol and Amoxicillin are categorized as vital items because they are commonly prescribed medications for pain relief and bacterial infections, respectively. Their unavailability could lead to severe consequences for patients.

Essential items:

• Medical supplies: These are important to the business, but may have lower usage rates or shorter lead times.
• Vitamins and supplements: These are not essential to the operation of the pharmacy, but may be popular with customers and generate significant sales.

Such as Ibuprofen and Cough Syrup are essential items, as they are important for managing pain and cough symptoms but are not as critical as vital items.

Desirable items:

• Non-essential over-the-counter products: These are not essential to the operation of the pharmacy, but may be useful or desirable to have on hand.
• Novelty items: These are not essential to the operation of the pharmacy, but may generate additional sales or customer loyalty.

Such as Vitamin C Tablets are desirable items, as they are not crucial for the pharmacy’s operations but can be stocked to meet occasional demands or for customer convenience.

Based on the VED analysis, the pharmacy might prioritize its inventory management efforts for vital and essential items, while keeping a lower level of safety stock for desirable items. This could help the pharmacy optimize its inventory levels and minimize carrying costs.