Inventory Classification
Systems
ABC Classification
Based on: Annual consumption value (cost × demand)
A-items (Top 10–20%):
High-value items with low frequency of use. Require
tight inventory control, frequent reviews, and accurate
records.
Example: Expensive machinery parts or critical
electronic components.
B-items (Next 30%):
Moderate value and usage. Need moderate monitoring
and stock control policies.
Example: General maintenance items, mid-range office
supplies.
C-items (Remaining 50–60%):
Low-value, high-usage items. Simple controls and bulk
orders to reduce handling costs.
Example: Nuts, bolts, packaging materials.
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VED Classification
Based on: Functional importance of items to operations
V (Vital):
Essential for operations; a stock-out leads to
complete work stoppage. Must be always available.
Example: Critical medical supplies, key engine
components.
E (Essential):
Important, but operations can survive temporarily
without them. Needs close monitoring.
Example: Routine maintenance parts.
D (Desirable):
Least important; stock-outs do not affect
operations immediately.
Example: Office décor, optional tools.
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HML Classification
Based on: Unit price (not total consumption)
H (High-cost items):
Expensive per unit, even if not frequently used.
Tightly controlled with proper authorization for use.
Example: Diagnostic equipment, premium tools.
M (Medium-cost items):
Moderately priced and generally used more
regularly.
Example: Basic electrical components, standard
instruments.
L (Low-cost items):
Cheap per unit; typically used in large quantities.
Simple controls are sufficient.
Example: Pens, paper clips, screws.
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SDE Classification
Based on: Procurement difficulty
S (Scarce):
Hard to source due to import issues or supplier
limitations. Requires advanced planning and buffer
stock.
Example: Imported specialized chemicals.
D (Difficult):
Available but may have limited sources, longer lead
times.
Example: Custom fabricated items.
E (Easily available):
Widely available in local markets. Short lead time
and lower procurement risk.
Example: Common packaging materials.
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FSN Classification
Based on: Consumption pattern or movement
frequency
F (Fast-moving):
High usage rate. Needs frequent replenishment.
Should be stored at accessible locations.
Example: Stationery, cleaning supplies.
S (Slow-moving):
Moderate usage. Needs periodic review and
forecast-based ordering.
Example: Spare machine parts.
N (Non-moving):
Rarely or never used. Indicates obsolete or
excess inventory.
Example: Old stock, discontinued parts.
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XYZ Classification
Based on: Demand variability and forecasting
accuracy
X:
Very predictable demand. Suitable for automated
replenishment and tight control.
Example: Core selling products like best-selling
SKUs.
Y:
Somewhat variable demand, affected by
seasonality or external trends. Requires moderate
forecasting effort.
Example: Seasonal items like winter clothing.
Z:
Highly erratic or irregular demand. Hard to
predict. Stocked with caution or made-to-order.
Example: Custom or niche products.
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Benefits
Improved Inventory Control: Helps prioritize
control efforts based on item value and
demand.
Reduced Costs: Optimizes inventory levels,
minimizing storage and holding costs.
Better Forecasting: Provides insights into item
demand patterns, aiding in accurate
forecasting.
Efficient Storage: Allows for optimized storage
strategies based on item classification.
Enhanced Decision Making: Provides data-
driven insights for inventory management
decisions.
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