ABC ANALYSIS & VED ANALYSIS

INTRODUCTION

In health care system, material management is concerned with providing the drugs, supplies
and equipment needed by health personnel to deliver health services.

The right drugs, supplies and equipment must be at the right place, at the right time, and in
the right quantity in order that health personnel deliver health services.

Inventory control it is an important aspect of material management.

Inventory control is a scientific system which indicates as to what to order, when to order,
and how much to order, and how much to stock so that purchasing costs and storing costs are
kept as low as possible.

OBJECTIVES OF INVENTORY CONTROL

 To keep the investment on inventories to the minimum.

 To minimize idle time by avoiding stock outs and shortages.
 To avoid carrying cost.
 To improve quality of care with lesser inventory.
 To avoid obsolescence of inventor

TECHNIQUES IN INVENTORY CONTROL

1. ABC Analysis (Always Better Control)

2. VED Analysis (Vital, Essential, Desirable)
3. HML Analysis (High, Medium, Low)
4. FSN Analysis (Fast, Slow moving and Non-moving)
5. SDE Analysis (Scarce, Difficult, Easy)
6. XYZ Analysis
7. GOLF Analysis
8. SOS Analysis

Items in the hospital can be analyzed into number of techniques, but the most widely used
classification is ABC and VED analysis. These types of analysis are practiced in medical
store since 1981 on the recommendations of Administrative Reform Committee.
 ABC ANALYSIS
WHAT IT IS?

ABC analysis is a basic supply chain technique in inventory control. It is very common tool
in all the stores where all large inventory items are stocked. ABC classification is a systemof
categorization of items/ inventory in three classes with each class having a different
management control associated and is based on cost factor or on their annual consumption
value.

ABC analysis popularly known as “always better control” or “alphabetical approach. It is a

very useful approach to material management based on Pareto’s principle of “vital few and
trivial many” based on capital investment of the item and on cost criteria or in simple term is
based on annual consumption value of said item.

Annual Consumption= Quality consumed X cost of the item.

ABC analysis helps us in segregating the items from one another and tells us how much
valued the items is and controlling it to what extent is in the best interest of the organization.

o It is the analysis of stores items on cost criteria. It has been seen that a large number
of items consume only a small percentage of resources and vice versa.
A items- represents high cost Centre
B items- intermediate cost Centre
C items- low cost Centre
o “It is the process of classifying items by using values as measure”.

OBJECTIVE

The main objective is to frame policy guidelines regarding control of items.

 Expensive items are to be branded as A items, which constitute 10% of overall items
but whose percentage in terms of value is around 70%.
 The least expensive items are to be branded as C items, whose number of items but its
value will be around 10% of the total items of inventory.
 The in-between are to be branded as B items.

PARETO’S THEORY

According to Pareto’s theory 10% items consume about 70% of budget (group A). The next
20% consume 20% of financial resources (group B) and remaining 70% items account for
just 10% of budget (group C).

It is also known as Selective Inventory Control (SIM), since this method is a means of
categorizing inventory items according to the potential amount to be controlled.
Based on ABC analysis average pattern of percentage of items and percentage of their
respective values may work out approximately as follows.

ITEMS A B C
Number of items as a
% of total number 10 20 70
Annual usage value
as a % on total usage 70 20 10
value

Annual value (a) is defined as: A= VQ, where, Q= annual consumption on quantity terms

V= value (cost) per item

“A” Items

 These are small in number, but consume large amount of resources and are managed
by top management.
 These items must have tight control, rigid estimate of requirement, strict &close
watch and require low safety stocks.
 These items consume major portion of funds.

“B” Items

 There have moderate control.

 These are items are purchased based on rigid requirements and reasonably has strict
watch and control. Safety stocks are maintained moderately.
 For these items the management is done by middle level managers.

“C” Items

 These items are large in number, but consume lesser amount of resources and must
have ordinary control measures.
 The purchase is based on usage estimates but require high safety stocks.

PROCEDURE OF ABC CLASSIFICATION

When carrying out an ABC analysis, inventory, items are valued with results then ranked.
The results are then grouped typically into three band. These bands are called ABC codes.

Steps 1:

List down item-wise annual consumption of inventory within its unit price and determine the
annual consumption of each item.
Step 2:

Rewrite the above listing descending order of money value with additional column to enter
‘cumulative % value’.

Steps 3:

a. From the list prepared, mark the serial number of items against which the cumulative
% value of annual consumption reaches a figure of 70% approximately. These are
called class a items as a percent of total items.
b. Continue this process down the list and note the serial number of items against which
the cumulative % value reads approximately 90%. These additional items constitute
class B.
c. The remaining items in the list from class C items and determines quantity in percent
of total number of items.

Steps 4

Plot curve with cumulative percentage of annual usage on quantity terms on X- axis and
money value on Y-axis.

COMPARIASON OF ITEMS IN ABC

SR. A Items B Items C Items

NO
1 High consumption value Has moderate value Has low consumption value
2 Very strict control Moderate control Loose control
3 No or very low safety Low safety stocks High safety stocks
stock
4 Frequent ordering Once in three months Bulk ordering once in 6
months
5 Maximum follow up & Periodic follow up Follow up & expediting in
expediting exceptional cases
6 Weekly control statement Monthly control reports Quarterly control reports
7 Maximum value analysis Moderate value analysis Minimum value analysis
8 Accurate forecasting in Estimation based on past Rough estimation
material management record
9 Many sources for each Two or more reliable Two reliable sources
item sources
10 Minimization of waste, Quarterly control over Annual review over surplus
obsolete and surplus surplus and obsolete and obsolete items
items
11 Central purchasing Combination purchasing Decentralized purchasing
12 Maximum effort to Moderate effort to reduce Minimum clerical efforts
reduce lead time lead time
13 Handled by top Can be handled by Can be fully delegated
management middle management
PRINCIPLES OF ABC ANALYSIS

 The analysis is depends on its annual consumption values rather than unit cost
 The limits for ABC categorization are not uniform but depends on the size of
organization, its inventory as well as number of items controlled.
 The analysis does not depend on the importance of items rather based on material
prize, material credibility, and available status of material, material physical
characteristic and frequency of material usage.
 It also depends on degree and characteristics of controls to be exercised by the
management: the necessity of control, the necessity of which material to be placed
under control and particular characteristics of material.

ADVANTAGES

 Provides a mechanism for identifying items that will have a significant impact on
overall inventory cost.
 It helps in economizing ones effort to achieve greater results.
 It helps to segregating those items which ought to be given priority to maximize
results.
 The usefulness of this management tool is that, by focusing on the ‘A’ category items,
70% results can be achieved with just 5% effort.
 Once A category items are identified, it is possible to devote more attention to these
items to minimize purchase costs and exercise control over consumption in a more
effective manner.
 Simple no confusing formulas are involved
 Investment in inventory can be maintained
 Easy to control the wastage of costly items
 Helps in maintaining safety to the total cost
 Easy to maintain stock and turnover rate
 Helps to exercise selective control when confronted with large number of items
 Rationalizes the number of orders, number of items & reduce the inventory
 Shows visible results in a short span of time
 Helps to pin point the obsolete stocks
 Helps in reducing clerical cost
 Proper use of valuable time of store personnel.

LIMITATION

 When number of items runs into several thousands, it is not convenient to

compute and carry out this analysis.
 Loose control on C may result in shortages
 ABC focuses on money value and not on functional importance of such items,
resulting in shortages of critical items.
 ABC does not take into account variation of prices of items as time goes.
  ABC ignores market conditions, market availability, competitions, seasonal
variations etc.
 Proper standardization and codification of inventory items is required
 Periodic review becomes difficult if only ABC analysis is recalled

APPLICABILITY

 It has universal application for field requiring selective control

 It extends almost all aspects of material management such as purchasing,
receiving and inspection.
 It can be used in any setting to control the cost.

VED ANALYSIS
In VED method (vital, essential and desirable), each stock item is classified on either vital,
essential or desirable based on how critical the item is for providing health services. The vital
items are stocked in abundance, essential items are stocked in medium amounts and desirable
items are stocked in small amounts. Vital and essential items are always in stock which
means a minimum disruption in the services offered to the people.

The stores when subjected to analysis based on their criticality can be classified into vital,
essential and desirable stores. This analysis is termed as VED analysis.

Vital: items without which treatment comes to standstill: i.e. non- availability cannot be
tolerated. E.g. Oxygen Supply. Its shortage can cause havoc. These are stocked adequately to
ensure smooth operation.

Essential: Items whose non availability can be tolerated for 2-3 days, because similar or
alternative items are available. Essential items without which an institution can function but
may affect the quality of the services. For these items reasonable risk can be taken. If not
available, work will not stop but the efficiency of operations adversely affected due to
expediting expenses. These items should be sufficiently stocked to ensure regular flow of
work.

E.g. antibiotics, intravenous fluids etc.

Desirable: Items whose non availability can be tolerated for a long period. Unavailability of
which will not interfere with functioning because they can be easily purchased as and when
required. They may be stocked very low or not stocked.

E.g. tonics, cough syrup, B. Complex etc.

Although the proportion of vital, essential and desirable items varies from hospital to hospital
depending on the type and quantity of workload, on an average vital items are 10%, essential
items are 40% and desirable items make 50% of total items available.
Although not included in scientific VED analysis, in some public organizations which are
static or inefficiently managed, there is a peculiar category of ‘U’ items which can be
grouped as unnecessary.

These unnecessary items get purchased due to the following reasons.

a) Thoughtless continuation of previous purchase.

b) Indifferent attitude towards hospital formulary

c) Fear of change

d) Poor supervision and control

e) Unfair practice due to vested interest.

The vital items are stocked in abundance; essential items are stocked in medium amounts,
and desirable items we stocked in small amounts.

By stocking the items in order of priority, vital and essential items are always in stock which
means a minimum disruption in the services offered to the people.

PURPOSES

o In a manufacturing organization, there are number of items which are very vital or
critical in production.
o Their availability must be ensured at all times for smooth production, so need to be
strictly controlled.
o Essential items follow vital items in their hierarchy of importance.
o Desirable items are least importance in terms of functional considerations, which are
loosely controlled at the lower level.

ADVANTAGES OF VED ANALYSIS

 It is useful for monitoring and of stores and spares inventory by classifying into 3
categories vital, essential and desirable.
 Determine the critically of an item and its effect on production and other services.
 It is specially used for classification of spare parts/items. If a part is vital it is given
“V” classification, if it is essential ,then it is given “E” classification and if it is not so
essential, the part is given “D” classification.
 For “V” items, a large stock of inventory is generally maintained, while for “D”
items, minimum stock is enough.
 It is useful in controlling and maintaining the stock of various types.
MATRIX OF ABC/VED ANALYSIS

There can be a combination of these two categories like a matrix combining ABC and VED
categories. This matrix is more relevant in the hospitals. The AV category becomes the most
important for inventory control because the items are very much cost consuming being a
category and also for vital for uses. These items can be controlled by the top level
management. The CD category items are not very costly and at same time of desirable
category. These items can be controlled at the lower level.

V E D ITEM COST
A AV AE AD Category 1 10 70%
B BV BE BD Category 2 20 20%
C CV CE CD Category 3 70 10%

CONTROL OF VED ITEMS

a. Category 1 items: These items are the most important ones and require control by the
administrator himself. (Needs close monitoring & control)
b. Category 2 items: These items are of intermediate importance and should be under
control of the officer in charge of the stores. (moderate control)
c. Category 3 items: These items are of least importance which can be left under the
control of the storekeeper. (No need for control)
d. The grouping will essentially depend upon the strategy of management and the
environment of functioning.
e. Items with high critically (V), but required in small quantity (E) should receive
highest priority. Items with low criticality (D) and which are required in big quantity
should receive least priority.

V Items E Items D Items

A Items Constant control regular Moderate stocks Nil stocks
follow up
B Items Moderate stocks Moderate stocks Low stocks
C Items High stocks Moderate stocks Very low stocks

ADVANTAGES

 Helps management to decide the material policy and what the service levels are
expected to see that no difficulty is faced
 To control the stock levels by visualizing the inventory carrying cost.
CONCLUSION

ABC & VED Analysis both are scientific system which indicates as to what to order, when to
order, and how much to order, and how much to stock so that purchasing costs and storing
costs are kept as low as possible

REFERENCES
Books Reference:

1. Basavanthappa B T. Nursing administration. 1st edition. New Delhi: Jaypee brothers

medical publishers (p) ltd; 2000

2. K. Deepak, Chandran Sarath et al “ a comprehensive text book on nursing

management” 1st edition, Bangalore: EMMESS medical publishers; 2017

3. Vati Jagindra “principles & practice of nursing management & administration” 1st
edition, New Delhi: Jaypee brothers medical publishers (p) ltd;2013

Net Reference :

1. www.materialsmanagement.info/inventory/abc-inventory-analysis.htm
2. currentnursing.com/.../material_management_ABC_VED_HML_analysis.html
3. https://www.welingkaronline.org/autoptlibrary/librarynotices/.
4. https://www.12manage.com/forum.asp?TB=materials_management&S=7