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Selective Control of Inventory:

Selective control refers to the variation in the method of control from item to item on some selective basis. For this, a variety of criteria are applied. They are:

• Based on the cost of the product/item
• Lead time
• Usage rate
• Procurement difficulties, critically, frequency of usage.

Selective control is more effective and is directed to more significant groups of items. In this system, the items are categorized into a few groups depending on the selected criteria such as value, usage, and frequency of consumption. Such grouping helps the organization with scientific inventory control. The various types of classifications are shown in the following Table.

Table: Types of Classifications

Always Better Control (A B C) Analysis

‘ABC’ Analysis is a basic tool that helps the management to place their efforts where the results would be useful to the greatest possible extent. The first important step in inventory management is to have a selective approach to fix-up inventory levels, order quantities, and the extent to which the control can be exercised. The selective strategy mostly depends on how often different things are consumed annually.

For example, the items like nuts and bolts (though equally important) cost less than the items like engines. But we cannot safely stock the items like engines because of their heavy cost, while the items like nut bolts can be easily stocked. As a result, less supervision is needed while stocking goods like nuts, bolts, etc. But, more emphasis should be given to controlling the stocking of big items like engines. Such investments need a substantial outlay of funds, and maintaining records is costly.

For such selective control, ABC (Always Better Control) analysis is a very powerful technique. This technique involves the classification of inventory items into three categories A, B, and C in descending order of annual consumption and annual monetary value of each item. Based on ABC analysis, an average pattern of percentages of items and percentages of their annual consumption value may be planned as below:

In actuality, a large percentage of inventory items have a poor usage value.

$$Annual\;usage\;value\;=\;(annual\;requirement)\;x\;per\;unit\;\cos t.$$

Thus for better and more economic control of items in inventory, the items should be classified according to their significance or priority for recording. Therefore, a choice must be made as to which goods are minor and which require more meticulous management for effective inventory control. The items of an inventory can be classified according to the following characteristics.

• Items that are functionally critical to the operations, no matter how little they cost.
• Items that are important because their usage value is very high.
• Items having average usage value.
• Items that have low usage value.

The “ABC” analysis is based on Pareto’s Law, which states that a small number of high-usage items make up a considerable portion of the capital invested in inventories, whereas the majority of low-usage items make up a negligible portion of the capital.

This concept is based on selective control. If there are large numbers of items to be analyzed, then a sampling technique may be used for ABC analysis.

In ABC analysis, the items are classified into three main categories based on their respective usage value:

(i) Category ‘A’ items: More costly and valuable items are classified as ‘A’. Such items have large investments but not much of a number, e.g., say 10% of items account for 75% of total capital invested in inventory. Therefore, closer monitoring and care must be taken with such things.

The items in this category should be ordered frequently but in small numbers. A periodic review policy should be followed to minimize the shortage percentage of such items and top inventory staff should control these items. These items have high carrying costs and frequent orders of smaller sizes for these items can result in enormous savings.

(ii) Category ‘B’ items: The items categorized as “B” have an average consumption value. Nearly 15% of the items in an inventory account for 15% of the total investment. These items have less importance than ‘A’ class items but are much more costly to pay more attention to their use. These items cannot be overlooked and required a lesser degree of control than those in category ‘A’. To control them, statistical sampling is typically helpful.

(iii) Category ‘C’ items: ‘C’ category items are those with low consumable value. Nearly 75% of inventory items account only for 10% of the total invested capital. Such items can be stoked at an operative place where people can help themselves with any requisition formality. These items can be charged to an overhead account. Loose control of ‘C’ items increases their investment cost and expenditure on shelf wear. obsolescence and wasteful use, but this will not be so much offset the saving in recording costs.

Important points for ABC analysis:

• Whenever the items can be substituted for each other they should be preferably considered as one item.
• The value of consumption should be stressed more than the price per unit of an item.
• While classifying an A, B, or C, all the items an organization consumes should be considered together, instead of spares, raw materials, semi-finished, and finished items, and then classified as A, B, or C.
• If required, there may be more than three classes and consumption periods that need to be one year.

The following table can be used to compare products in the A, B, and C categories: