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Unit 12: Service Level Method of Determining Q – ABC Classification

Other similar types of classifications are the XYZ Classification, VED Classification, and the HML Notes

classification of inventory. The basic difference between the ABC Classification and the XYZ
Classification is that it is based on the inventory in stock rather than usage.

The VED Classification is based on the criticality of the inventory item. In normal practice, items

in the ‘V’ category are often monitored manually; in addition to the computer monitoring that
may be in place. The HML reflects a classification based on the unit price of the item. Obviously,

the ‘H’ category items require additional attention, especially if the lead times are long, as it may
often be in imported components. The ‘time’ triggered reorder system has some advantages in
production cycling, in such high value items.
All these techniques are used to focus management attention in deciding on the degree of control
necessary for different items in the inventory. However, it should be kept in mind that changes in
the business environment, e.g., customer demand patterns or material costs, can cause material

item classifications to change. This, in turn, can affect key ‘planning & scheduling’ decisions.

Prepare a study note on the concept and usefulness of ABC classification.

12.3 Summary

In most cases Pareto’s Rule then applies, so that approximately 20% of the items accounts
for approximately 80% of the value of the stock held; these items are classified as Class A

items. Class B covers the 30% of items that represent the next 10% of value. Class C covers
the remaining 50%, which accounts for the remaining 10% of value.
In material requirements planning (MRP), ranking is used to categorize inventory by its
impact value, i.e. whether or not production will stop if this item is out of stock.

The VED Classification is based on the criticality of the inventory item. In normal practice,
items in the ‘V’ category are often monitored manually; in addition to the computer
monitoring that may be in place.

12.4 Keywords

ABC Classification: The ABC classification is based on focusing efforts where the payoff is
highest; i.e., high-value, high-usage items must be tracked carefully and continuously.

HML: The HML reflects a classification based on the unit price of the item.

VED Classification: The VED Classification is based on the criticality of the inventory item.
In normal practice, items in the ‘V’ category are often monitored manually; in addition to the
computer monitoring that may be in place.
12.5 Self Assessment

Fill in the blanks:
1. ........................ postulated the 80-20 rule.
2. The ........................ is based on focusing efforts where the payoff is highest
3. Tight control, sound operating doctrine, and attention to security on these items would
allow you to control a ........................ with a reasonable amount of time and effort.

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