Materials Management and Inventory Control: EOQ, ABC, VED, FSN and JIT
Materials management ensures that the right goods are available in the right quantity, quality, time and cost. EOQ optimises order size; ABC classifies annual consumption value; VED classifies criticality; FSN classifies movement; and JIT seeks to reduce inventory through reliable replenishment. UPSC Stores Officer and Administrative Officer aspirants should study how each tool answers a different inventory decision.
Updated educational notes · official sources and original practice questions · no fabricated PYQ attribution
Inventory tools compared in one table
| Method | Basis | Typical decision |
|---|---|---|
| EOQ | Annual demand, ordering cost, holding cost | Optimum order quantity under model assumptions |
| ABC | Annual consumption value (unit cost × annual usage) | How closely should an item be financially controlled? |
| VED | Criticality to operations | Which items cannot be allowed to stock out? |
| FSN | Inventory movement and rate of use | Which stock is fast-moving, slow-moving or non-moving? |
| JIT | Timed supply and reduced buffers | How can material arrive close to the moment of use? |
| Reorder point | Lead-time demand plus safety stock | When should a replenishment order be placed? |
Exam trap: An inexpensive lifesaving spare can be ‘C’ under ABC yet ‘Vital’ under VED. The two categories do not contradict one another; they measure different risks.
EOQ: formula and full solved numerical
The classical Economic Order Quantity formula is EOQ = √(2DS/H), where D = annual demand (units), S = cost per order (₹ per order) and H = annual holding cost (₹ per unit per year). It assumes fairly constant demand, lead times and unit price, without shortages or volume discounts.
Worked example: An office uses 12,000 units per year, placing an order costs ₹300 and carrying a unit for a year costs ₹20. EOQ = √[(2 × 12,000 × 300)/20] = √360,000 = 600 units. That implies 12,000/600 = 20 orders a year. Annual ordering cost = 20 × ₹300 = ₹6,000. Annual holding cost on average cycle stock = (600/2) × ₹20 = ₹6,000. The equality at EOQ is a useful self-check.
Second scenario: If holding cost doubles while demand and ordering cost are unchanged, EOQ falls by a factor of √2. Higher carrying costs favour smaller order quantities.
ABC–VED combined matrix in stores management
ABC grouping often places approximately 70–80% of annual consumption value in relatively few A-class items; these percentages are heuristic, not statutory limits. VED should be assigned by operational risk. A hospital consumables store may prioritise AV, AE and BV items differently from an administrative stationery store.
| Item | ABC | VED | Practical action |
|---|---|---|---|
| High-cost specialised replacement assembly | A | Vital | Tight forecasting and high control |
| Common printer paper | B / C (depending on spend) | Desirable | Periodic review and economical replenishment |
| Low-cost safety component | C | Vital | Adequate availability despite low price |
Reorder point, safety stock and JIT
Reorder point (ROP) = expected demand during procurement lead time + safety stock. Suppose average demand is 40 units per day, supplier lead time is 8 days and safety stock is 100 units. ROP = 40 × 8 + 100 = 420 units. Place a new order when the inventory position reaches the threshold according to the system being used.
JIT: reducing stock lowers carrying costs but increases dependence on accurate forecasts, supplier reliability, logistics and quality. It is poorly suited to every critical spare without considering demand shocks. Apply FSN periodically to uncover obsolescence and non-moving stock.
Purchase price vs total cost: the cheapest unit price may not yield the lowest total acquisition, handling, storage and service cost. Government procurement also requires GFR/GeM compliance.
Original UPSC-style questions and explanations
1. What does ABC analysis classify?
Answer: Annual consumption value. Usage × unit value.
2. What is the EOQ for D=12000, S=300, H=20?
Answer: 600 units. √(2DS/H)=600.
3. What does V mean in VED?
Answer: Vital. VED ranks operational criticality.
4. What does FSN classify?
Answer: Movement rate. Fast/slow/non-moving.
5. What is ROP at demand 40/day, lead time 8 days, safety stock 100?
Answer: 420 units. 40×8+100.
6. At classical EOQ, which two variable annual costs are equal?
Answer: Ordering and cycle holding costs. This is the EOQ balance condition.
Frequently asked questions
Is ABC based on unit price alone?
No. It uses annual consumption value.
Is EOQ always the cheapest option in real procurement?
No. Quantity discounts, variable demand, statutory procurement conditions and stockout risks can change the result.
What are the three FSN classes?
Fast-moving, slow-moving and non-moving.
Why combine ABC and VED?
To balance financial value with operational criticality.
Can JIT eliminate safety stock in every setting?
No. Criticality, reliability and uncertainty determine appropriate buffers.