What's VED Analysis in Inventory Management? Figure out the Importance, Classification, Usage + Much More...!

Prof.(Dr.) D G Mahto, Founder & CEO -
Abstract
VED analysis is an inventory management technique that classifies inventory based on its functional importance. It categorizes stock under three heads based on its importance and necessity for an organization for production or any of its other activities. VED analysis stands for Vital, Essential, and Desirable.

Keywords
Vital, Essential, Desirable.
Inventory, Materials Management, 
Learning Outcomes
After undergoing this article you will be able to understand the following
1. What's VED Analysis?
2. Why VED analysis is important for inventory management?
3. How the categories of  VED analysis are effectively carried out?
4. What are the benefits of VED analysis?
5. What are the shortcomings of VED analysis?
6. What's the Applications of VED analysis?
7. How to devise strategies for VED analysis in inventory Management ?
8. Conclusions
9. FAQs
References 


1. What's VED Analysis?

VED analysis is an inventory classification technique that divides items into three fundamental categories:

  • Vital (V): These are products that are absolutely crucial for business operations. Without them, production or sales could come to a halt, significantly impacting profitability and customer satisfaction.
  • Essential (E): These items are important but not critical. Their absence could cause inconveniences and delays but wouldn't completely halt business operations.
  • Desirable (D): These are products that, while not essential, enhance the customer experience or business efficiency. Their absence wouldn't significantly impact operations but could affect reviews and brand perception.

2. Why VED analysis is important for inventory management?

VED inventory management is a technique that makes it easier for industries to adjust their inventory according to available resources and budgets. Here are some examples of why VED Analysis in important:

  1. Managing inventory levels: Manufacturing industries use VED analysis to manage inventory of raw materials. It helps this industry to guarantee the availability of items at all times.

  2. Managing capital: With the availability of raw materials which are important for production, manufacturers can deliver orders on time and also save capital in the process. 

  3. Reducing holding costs: With better time management and enough inventory items in hand, VED analysis also reduces holding costs.

  4. Improving customer service: Every customer demands on-time services. With better time management and inventory items availability, VED analysis in inventory management also improves customer satisfaction. 

The relevance of VED analysis lies in its ability to help you prioritize effectively. In the world of E-Commerce, where resources and time are often limited, knowing where to invest your energy and capital is crucial. By classifying your products according to their importance, you can:

  • Ensure that vital products are always in stock, preventing operational disruptions.
  • Optimize inventory levels for essential products, reducing storage costs.
  • Make informed decisions about promotions, discounts, and special offers for desirable products, enhancing the customer experience.


Extended application in E-Commerce:

Imagine you run an online store selling a variety of clothing and accessories. Items like jeans and t-shirts could be considered "vital" as they are best-sellers and generate most of your revenue. Accessories like belts, scarves, or even shoes could be "essential." Seasonal items like swimsuits or winter clothing could be "desirable," as their demand fluctuates according to the season.

VED analysis is more than just a classification technique; it's a comprehensive inventory management strategy that can have a significant impact on the efficiency and profitability of your E-Commerce business.

3. How the categories of  VED analysis are effectively carried out?

To get a clear understanding of your items, using VED analysis, you need to follow a standardized process. Here are the steps to perform VED Analysis:

1. Identify:

This includes inventory items such as raw materials, work in progress, finished goods, and other available items. You need to note all of these things and then move to the next step.

2. Classify:

Once you have understood all your inventory items, you need to classify them and understand them in detail. Here is how you can classify them:

  • Vital Items: Vital items are important for smooth operations in any industry. These items are high value and have longer shelf life, and if they are unavailable, they can result in a delay in the process.
  • Essential Items: Essential items are also important for production in the industry, but their absence does not cause any delays in production functioning.
  • Desirable Items: These items are not important but are just nice to have. The items in this type can be promotional material that does not affect the functioning of the production line.

3. Consider

  • The inventory items that are very important for the smooth functioning of the production line. It focuses on the inventory items that are important for the production. It is mostly about the usage of the item, not their value.
  • The cost of stockouts. Most manufacturers face a loss of capital in case there are stockouts. It affects the whole production process. VED analysis maintains vital items in inventory which will reduce stockouts.
  • Lead time of each item. With less stockouts, the lead time also decreases. 
  • Availability of substitutes. If manufacturers find difficulty in maintaining important inventory items, they find substitutes to replace them.

4. Develop inventory management strategies 

The final step is to create unique inventory management strategies as items are classified and developed. Desirable items must be ordered when needed, and vital items should always be in stock.

Here are some additional tips for performing VED analysis:

  1. Involve key stakeholders from all departments in the VED analysis process. This will help to ensure that all perspectives are considered and that the results are accurate and actionable.
  2. Review your VED analysis on a regular basis. This will help to ensure that your inventory management strategies are aligned with your changing business needs.
  3. Use a VED analysis tool to automate the process and improve accuracy. There are a number of VED analysis tools available, both free and paid.

VED analysis is a powerful technique that can help businesses to improve their inventory management and achieve a number of benefits. By following the steps above, businesses can implement VED analysis and start seeing results immediately.

Vital Items:

Vital items are inventory items that are required to a business’s operations and would cause a major disruption if they were to run out. Examples of vital items include:

  1. Raw materials
  2. Critical components
  3. Finished goods that are in high demand
  4. Spare parts for important equipment
  5. Safety supplies

Vital items should be prioritized in inventory management. Businesses should keep a high safety stock level of vital items to reduce the risk of stockouts. They should also use multiple suppliers and expedited shipping procedures to ensure that vital items are always available when needed.

4. What are the benefits of VED analysis?

The benefits of using VED analysis in inventory management include:

  1. Improved inventory visibility and control: VED analysis helps businesses to better understand their inventory and identify which items are the most important. 
  2. Reduced risk of stockouts: VED analysis helps businesses to ensure that they have enough of the most important items in stock at all times. This reduces the risk of stockouts, which can lead to lost sales and customer dissatisfaction.
  3. Optimized inventory costs: VED analysis helps businesses to optimize their inventory costs by allocating resources to the most important items. This can lead to reduced inventory carrying costs and improved cash flow.
  4. Improved customer satisfaction: By reducing the risk of stockouts and ensuring that customers have access to the products they want, VED analysis can help to improve customer satisfaction.
  5. Increased profitability: VED analysis can help businesses to increase their profitability by improving inventory management and reducing costs.

VED analysis is a simple but effective tool that can be used by businesses of all sizes to improve their inventory management and achieve a number of benefits.


5. What are the shortcomings of VED analysis?
VED inventory control systems can take a lot of time and resources to handle in large inventory settings. It is a time taking analysis and is very complex in nature. However it ignores the value of items and focuses only on usage.
  • Ignores the value of items and focuses only on their criticality.
  • Can be time-consuming and complex to implement for large inventories.
  • Assumes that the criticality of items is directly proportional to their usage, which may not always be the case.
6. What's the Applications of VED analysis

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.

7. How to devise strategies for VED analysis in inventory Management ?

Here are three steps for creating an inventory strategy for your business.
  1. Decide how much stock to keep. The first step is to decide the number of days of supply to keep for each item. ...
  2. Decide where to store it. 
  3. Decide how to replenish it.
Inventory management techniques and best practices for small business
  1. Fine-tune your forecasting. 
  2. Use the FIFO approach (first in, first out). ...
  3. Identify low-turn stock. ...
  4. Audit your stock. ...
  5. Use cloud-based inventory management software. ...
  6. Track your stock levels at all times. ...
  7. Reduce equipment repair times.
For applying  VED Analysis suitably, follow the following
To perform VED analysis, follow these steps:
  1. Identify all of your inventory items. ...
  2. Classify each item into one of the following three categories: ...
  3. Consider the following factors when classifying items: 
  4. Once all of the items have been classified, develop inventory management strategies that are tailored to each category.
Inventory managers face a daily battle – striking the right balance between too much and too little stock. This task requires a lot of careful planning, expertise and most of all, constant vigilance.

8. Conclusions
An ineffective inventory management system will incur more costs, less profit, faster churn, and slow business growth. With the above-mentioned effective inventory management techniques, you can easily optimize business growth by analyzing sales patterns and predicting future sales.

Now that you are aware of all there is to know about dealing with inventory management problems, it is time to manage your store’s inventory effectively.

9. FAQs
Q. What's the difference between ABC Analysis and VED Analysis?
Difference between ABC analysis and VED analysis.
ABC analysis and VED analysis are two different inventory control techniques that are widely used by businesses to manage their inventory efficiently. Both techniques help in determining the importance of items in a company's inventory, but they differ in their approach and application.

ABC Analysis:
ABC analysis is an inventory control technology that helps in classifying items in a company's inventory based on their importance. The technique involves categorizing items into three groups based on their relative value or importance to the company. The categories are:
  1. A Category: This category comprises the most important items in a company's inventory, usually constituting about 20% of the total inventory value but accounting for about 80% of the company's sales. These items require close attention and frequent monitoring to ensure that they are always in stock.
  2. B Category: This category comprises items that are moderately important, accounting for about 30% of the inventory value but generating only about 15% of the sales. These items require less attention than A-category items, but still, need to be monitored regularly.
  3. C Category: This category comprises the least important items, accounting for about 50% of the inventory value but generating only about 5% of the sales. These items require minimal attention and can be managed with a simple reordering system.
Advantages of ABC Analysis:
  • Helps in identifying the most important items in a company's inventory.
  • Enables a company to focus its attention and resources on the items that are most critical to its success.
  • Helps in reducing inventory holding costs by identifying the items that need to be monitored closely.
  • Helps in optimizing inventory levels by ensuring that the right amount of inventory is available for each category of items.
Disadvantages of ABC Analysis:
  • Ignores the usage rate of items and focuses only on their value.
  • Can be time-consuming and complex to implement for large inventories.
  • Assumes that the sales of items are directly proportional to their value, which may not always be the case.

VED Analysis:
VED analysis is another inventory control technology that helps in classifying items in a company's inventory based on their criticality. The technique involves categorizing items into three groups based on their criticality and the urgency of their availability. The categories are:
  1. Vital Category (V): This category comprises items that are essential for the company's operations, and their non-availability can cause significant disruptions to the production process or customer service. These items require immediate attention and should be kept in stock at all times.
  2. Essential Category (E): This category comprises items that are necessary for the company's operations, but their non-availability does not cause significant disruptions to the production process or customer service. These items should be kept in stock, but their inventory levels can be managed more flexibly than V-category items.
  3. Desirable Category (D): This category comprises items that are not essential for the company's operations, but their availability can improve efficiency or convenience. These items can be managed with a more flexible inventory system and can be ordered based on demand.
Advantages of VED Analysis:
  • Helps in identifying the items that are most critical to the company's operations.
  • Enables a company to focus its attention and resources on the items that are most essential to its success.
  • Helps in reducing the risk of stockouts for critical items.
  • Helps in optimizing inventory levels by ensuring that the right amount of inventory is available for each category of items.
Disadvantages of VED Analysis:
  • Ignores the value of items and focuses only on their criticality.
  • Can be time-consuming and complex to implement for large inventories.
  • Assumes that the criticality of items is directly proportional to their usage, which may not always be the case.

References 

Materials and Logistics Management by L. C. Jhamb


Handbook Of Materials Management by Gopalkrishnan


Introduction To Materials Management reference book by Tony Arnold


Materials & Logistics Management reference book By Dr. Kasande


Materials Management: Procedures, Text & Cases by A. K. Datta


Purchasing & Materials Management by Gopalakrishnan


Materials and Logistics Management reference book by 

Saroj Kumar





Prof. (Dr.) D. G. Mahto is a multifaceted professional, serving as a Director, Professor, Philanthropist, HEI Builder, prolific writer, international consultant, reviewer, and expert career advisor at "Career Education for Success—Discover, Apply, Succeed!" He has guided countless individuals, products, and brands in discovering their true potential through insightful content, purposeful concepts, and motivational writing. With a deep sense of leadership and a commitment to community upliftment, he inspires others with his success stories and takes on the challenge of driving technological transformation, redefining social impact, and fostering interpersonal relationships for a more meaningful, balanced life. Prof. Mahto is dedicated to bridging the gap between dreams and reality for young people, striving for qualitative change in their lives. To explore his articles, books, and international journal contributions, visit his blogs at Career Education Success Now, Career Edus, and Discover Knowledge Wisely. You can also reach out to him via email.

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