Guide to VED Analysis in Inventory Management

Introduction to VED Analysis

Streamlined inventory management is at the heart of any successful business in modern times. It makes sure that the factory has smooth operation, it optimizes cost control, and prevents disruptions in production. Among the several tools available for this work, VED analysis stands out as a strategic method for focusing on resources based on how critical the inventory items are. In this complete guide, we will look into what VED analysis is. 

We will also look in how this method is applied in the management of inventory,  how to classify items as VED. This will be followed by the advantages and disadvantages it brings to the table, so that readers are able to make informed choices of using it in their factory or not. 

What is VED Analysis? 

For factories looking to optimize their operations, VED analysis in inventory management stands for Vital, Essential and Desirable analysis. VED classification of inventory is an efficient way to classify and prioritize your products based on their criticality towards your factory operations. VED method of inventory control can be extremely useful to factories in optimizing their procurement processes. The three aspects of VED classification are:

• Vital (V): These are the products that are extremely important to your factory operations. The unavailability of these materials can put a lot of risk and pressure on your factory’s ability to meet demand. Inventory control for these products must be focused on avoiding factory failures. 
• Essential (E): These products, though not as important as the vital products, are important enough to avoid factory inefficiencies. Inventory control for these products would be more focused on reducing inefficiencies compared to avoiding factory failures. 
• Desirable (D): These are the lowest priority products with minimal or no impact on your factory operations. Inventory control for these products can be deprioritized against vital or essential products. 

An example of VED classification of inventory in a factory would categorize crucial machinery parts as vital. Packaging materials such as cardboard boxes would fall under the essential category. Miscellaneous office supplies would be the lowest priority products, falling under the desirable category of VED classification.

VED analysis in inventory management provides factories with a very structured approach in prioritizing and optimizing their inventory levels. This can help them best allocate their resources ensuring smooth factory operations. 

VED Analysis in Inventory Management 

While managing your inventory, the VED analysis framework will serve as a guide for prioritizing one’s stock. Manufacturers often face problems such as constrained budgets,  lack of storage space, and unavailability of enough manpower, which make it impossible to treat all inventory items with equal importance. By grouping the inventory items based on the sheer impact of their availability or shortage, the  VED analysis framework helps manufacturers focus their attention where it’s needed most.

This entire process begins by identifying all the inventory items followed by assessing their criticality. For each item in inventory, supervisors consider the questions such as: “What if this inventory item is unavailable?” and “What is the criticality of this item in maintaining smooth operations for one’s factory?”. Once this process is done, the items that are deemed most critical to the operations are put into the Vital category, those slightly less critical are put into Essential and  and the third priority goes to the Desirable category for less critical items.

This VED categorization helps streamline various decision-making, including budget allocation, procurement decisions, and stock replenishment orders. Other Vital items are often stocked in larger quantities or procured from reliable suppliers to minimize the risk of stockouts. Essential items may be maintained at moderate levels, while Desirable items may be procured only when budget permits.

For example, a manufacturing business might classify its inventory as follows: raw materials directly used in production are categorized as Vital, spare parts and tools as Essential, and optional supplies such as promotional items as Desirable. This prioritization ensures that resources are directed toward sustaining core operations without overspending on non-critical items.

VED Classification in Inventory Control 

VED method of inventory control is extremely vital to industries where certain components can critically impact their factory operations. A good example of this was when the semiconductor shortage had critically affected many automobile factories. VED classification follows a structured, step-by-step approach to help factories avoid such situations through: 

1. Listing Inventory Items: The first step is maintaining a complete item master, listing out all your products. This master list must contain all your products across raw materials, finished goods, packaging goods, and utility products. 
2. Analyzing Criticality: The most important step of VED analysis is evaluating all products within the item master basis their impact on factory operations. Factory managers can assess how a stock-out situation for the product would affect production, sales, and the overall factory supply chain. 
3. Assigning Categories: Once factory managers have the evaluation of the complete item master done, the final step is the classification of all items into one of three categories: Vital, Essential, or Desirable.

Example of VED Classification

For a factory producing chemicals, the VED classification would look like: 

1. Vital items would include raw materials that form the basis of the final product (for eg. sodium for manufacturers of sodium solutions). Without these raw materials, the finished good cannot be produced at all, halting the entire factory. 
2. Essential items would include supporting raw materials such as coal or water used for heating or dilution processes. Though these are important, the rest of the factory can continue to run, pushing the dilution process to backlog. 
3. Desirable items consist of all the products used to support operators such as notebooks, which would have negligible impact on the factory.

Using VED analysis, the chemical factory can optimize its resources by focusing on the critical and vital raw materials, ensuring smooth and continuous operations within your factory. 

Advantages and Disadvantages of VED Analysis 

Like any inventory management technique, VED analysis comes with its set of advantages and disadvantages.

Advantages of VED Analysis 

VED analysis offers a host of benefits to the users. Firstly, it enables a unique way for efficient resource allocation as it helps businesses focus efforts on inventory items that are most critical to operations. This prevents putting more than the required investment in items that are less important  to the business while assuring  that most Vital items to the business are always available for in the inventory.

The second main advantage of the VED method  of inventory control is cost optimization. By VED method categorizing of inventory units , businesses can avoid unnecessary expenses on non-important  SKUs for the business. This eventually leads to better usage of critical monetary resources and also in improved financial efficiency on the whole.

Additionally, the VED analysis tool also results better and improved decision-making for the business owners and managers. Inventory managers  are able to gain clarity on  items that should be prioritized for procurement and stock maintenance, thereby eventually  reducing guesswork and enhancing strategic production and stock planning.

Lastly, VED analysis helps in risk mitigation too.  When businesses area able to ensure the availability of Vital items, they are able prevent operational disruptions and sustain service continuity, even during unforeseen circumstances.

Disadvantages of VED Analysis

VED classification of inventory, though very helpful has its limitations as listed below: 

1. VED analysis is very subjective, depending on the factory manager’s perspective of the important products. Since there are no quantitative metrics associated with VED analysis, tracking and monitoring this list can become difficult. 
2. VED analysis can also have the consequence of neglecting items that are not vital or essential. This could place long-term pressure on the factory when some products are continuously ignored. 
3. The subjective nature of VED analysis also implies that it has to be monitored and repeated frequently, requiring significant effort from the factory team involved. 
4. Finally, the technique has a limited scope. It focuses primarily on criticality and may not account for other factors such as seasonal demand variations, supplier reliability, or lead times.

Conclusion 

Thus, VED analysis is a critical tool for modern SKUs management in inventory. In thus, we categorize Skus in 3 broad categories: Vital, Essential, and Desirable which helps provide factories with a more structured framework of  prioritizing resources, thereby optimizing costs, and mitigating risks. 

Implementing VED analysis of inventory management helps managers ensure that the utmost critical items are readily available when needed, while also ensuring  minimized wastage on the on-essential stock.

VED analysis is critical ideology behind modern ERP systems . Thus, investing in an advanced ERP system can make a lot of difference in relation to streamlining inventory management processes. With critical features that automate classification and track stock levels in real-time , Procuzy’s ERP solution is designed to help you manage inventory with precision and efficiency.

Take control of your inventory with Procuzy’s advanced ERP system. Schedule a Free Demo Today!