Page 189 - DCOM505_WORKING_CAPITAL_MANAGEMENT

Working Capital Management

Notes Besides the ABC there are number of other classification emphasizing on particular aspects.
These are:

HML Classification

The HML (High, Medium, Low) classification is similar to ABC classification, but in this case
instead of the assumption value of item, the unit value of the item is considered. The cut off
points will depend on the individual units.

Example: Kerosene would be a low value item for a jeweler and a high-value item for a
small shopkeeper.
The focus here is directed to control the purchase prices.

XYZ Classification

While the ABC classification has the value of the basic, the XYZ classification has the value of
inventory stored as the basis of differentiation. This study is usually undertaken once a year
during the annual stock checking exercises. X items are those whose inventory values are high
while Z items are those whose values are low. This classification, therefore, helps in identifying
the items which are being extensively stocked. If the management is not alert, one can accept C
items to be in the X category. Therefore, the XYZ and ABC classification are used in conjunctions
and controls can be affected on the items according to whether they are AX, BY, CZ and so on.

Task By the help of example discussed in ABC classification, construct another example
to illustrate XYZ classification.

VED Classification

The VED (Vital, Essential, Desirable) classification is applicable largely to spare parts. Stocking
of space parts is based on strategies different from those of raw materials because their
consumption pattern in different. While consumption of raw material depends directly on the
market demand for spare for spares follow the Poisson distribution and therefore, spares are
classified as vital, essential and desirable. This implies that vital classes of spares have to be
stocked adequately and so on. Also ABC and VED classifications can be combined to advantage.
A combination of XYZ and VED methods can give an idea of what are the items that can be
disposed off to train the inventory.

FSN Classification
Movement analysis forms the basis for FSN (Fast moving, Slow moving and Non-moving)
classification and the items are classified according to their assumption pattern. If there is a paid
change in technology, this classification will have to be up dated more often. FSN analysis is
specially useful to combat obsolete items. Cut-off points in the previous few years.

SDF and GOLF Classifications

It should not be overlooked that inventory levels also dependent on the source a scare item with
a long lead time will have a higher safety stock for the same consumption level. The SDF (Scarce,
Difficult, Easy to obtain) classification and the GOLF (Government, Ordinary, Local, Foreign

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