Posted By:Krishna Jani
Updated: 19 July, 2023Published: 12 July, 2023
Reading Time: 2 minutes

Inventory classification involves categorizing the items in an inventory in accordance with their demands, value, the income they generate, carrying costs, etc.

Inventory classification is the process of categorizing inventory items based on specific criteria or characteristics. It involves organizing and grouping inventory items into different classes or categories to facilitate better management, control, and decision-making regarding inventory levels, ordering, and storage.

There are several common methods or techniques used for inventory classification, including:

ABC Analysis: This method categorizes items based on their value or importance and is divided into A, B, and C classes. Class A items are typically high-value items that contribute a significant portion of the inventory's value but represent a smaller portion of the total item count. Class B items have moderate value and demand, while Class C items are lower in value but may have a higher volume.

XYZ Analysis: This approach categorizes items based on their demand variability. X items represent items with stable and predictable demand, Y items have moderate demand variability, and Z items have highly variable and unpredictable demand. This classification helps in determining appropriate inventory control policies for each category.

VED Analysis: This classification method is commonly used in industries where stockouts can have severe consequences, such as healthcare. Items are categorized into three classes: Vital, Essential, and Desirable. Vital items are critical for the organization's functioning and have a higher priority, while Essential and Desirable items have a relatively lower priority.

FSN Analysis: This method classifies items based on their consumption pattern. F items are fast-moving items with high consumption frequency, S items have a steady consumption pattern, and N items are slow-moving items with low consumption frequency. It helps in determining reorder levels and managing stockouts for fast-moving items.

HML Analysis: This technique classifies items based on their unit price or cost. H items are high-cost items, M items have moderate costs, and L items are low-cost items. It assists in setting appropriate inventory control measures and monitoring high-value items more closely.

These classification methods are not mutually exclusive, and organizations may use a combination of them to gain a more comprehensive understanding of their inventory and optimize inventory management practices. By classifying inventory items, businesses can allocate resources efficiently, prioritize inventory control efforts, identify obsolete or slow-moving items, and make informed decisions regarding replenishment, storage, and procurement strategies.

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