CRACKTARGET · UPSC SPECIALISED RECRUITMENT · GUIDE 05 / 10
Materials management balances availability, cost, quality and stock risk. EOQ estimates an economical order size under stated assumptions. ABC classifies annual consumption value, VED classifies criticality and FSN classifies movement. Use these tools together: an inexpensive item can still be vital to operations.
Study notes · Comparison tables · Original practice · Answers with explanations
Published: 23 October 2026 · By: CrackTarget Editorial Team
On this page
Inventory techniques compared · Formula sheet with consistent units · EOQ worked example · Why ordering and holding costs balance · Reorder point and safety stock · ABC calculation and interpretation · Combine ABC with VED · JIT, vendor performance and public purchasing · Five-minute numerical checklist · Practice questions · FAQs · Sources · All 10 guides
Inventory techniques compared
| Technique | Classification basis | Decision supported |
|---|---|---|
| ABC | Annual consumption value | Financial control priority |
| VED | Vital, essential, desirable criticality | Protection against operational failure |
| FSN | Fast, slow, non-moving | Movement review and stock disposal |
| HML | Unit price: high, medium, low | Item-level price control |
| SDE | Scarce, difficult, easy availability | Sourcing risk |
| JIT | Supply close to actual need | Lower inventory with reliable flow |
Formula sheet with consistent units
| Measure | Formula | Unit check |
|---|---|---|
| EOQ | √(2DS/H) | D: units/year; S: cost/order; H: cost/unit/year |
| Orders per year | D/Q | Q in units/order |
| Annual ordering cost | (D/Q) × S | Cost/year |
| Average cycle stock | Q/2 | Units; excludes safety stock |
| Annual holding cost | (Q/2) × H | Cost/year |
| Reorder point | Lead-time demand + safety stock | Units |
| Annual consumption value | Annual usage × unit price | Currency/year |
EOQ worked example
Annual demand D = 10,000 units, ordering cost S = ₹200 per order and annual holding cost H = ₹4 per unit. EOQ = √[(2 × 10,000 × 200)/4] = √10,00,000 = 1,000 units.
Orders per year = 10,000/1,000 = 10. Annual ordering cost = 10 × ₹200 = ₹2,000. Average cycle stock = 500 units and annual holding cost = 500 × ₹4 = ₹2,000. Relevant annual cost is ₹4,000, excluding purchase cost, safety-stock cost and other costs not included in this model.
Why ordering and holding costs balance
A larger order reduces order frequency but increases average cycle stock. A smaller order does the reverse. Under the basic continuous EOQ assumptions, the minimum of the two-cost total occurs where annual ordering cost equals annual cycle-stock holding cost.
Do not generalise this equality to every inventory model. Quantity discounts, uncertain demand, shortages, staggered replenishment and capacity constraints can change the optimisation problem. First identify the model.
Reorder point and safety stock
Suppose average usage is 40 units per day, lead time is 8 days and safety stock is 100 units. Lead-time demand is 320 units. Reorder point = 320 + 100 = 420 units.
EOQ answers how much to order; reorder point answers when to order. If the question uses working days for demand but calendar days for lead time, reconcile the units. Do not multiply annual demand directly by a lead time expressed in days.
ABC calculation and interpretation
Consider three items: X uses 100 units at ₹1,000 each, Y uses 1,000 units at ₹20 each, and Z uses 5,000 units at ₹1 each. Annual values are ₹1,00,000, ₹20,000 and ₹5,000. Total is ₹1,25,000. X accounts for 80% of value despite its lower unit count.
Rank items by annual value and compute cumulative percentages before assigning categories under the organisation’s policy. The often-quoted ABC percentages are guidelines, not a law that every dataset must match exactly.
Combine ABC with VED
A low-value vital spare may receive little attention under ABC alone. VED corrects that blind spot by asking what happens if the item is unavailable. A joint matrix supports differentiated reviews: financially important stock needs close value control, and vital stock needs robust availability planning.
FSN asks another question: does the item actually move? A non-moving item may be obsolete, seasonal, insurance stock or blocked by a specification change. Investigate before recommending disposal.
JIT, vendor performance and public purchasing
JIT depends on reliable suppliers, consistent quality, predictable flow and coordinated scheduling. Reducing stock without addressing supply uncertainty can increase stoppages. Track delivery adherence, rejection rates, lead-time variability and response to disruptions.
In public purchasing, an inventory recommendation must also fit the procurement procedure. An EOQ calculation does not override sanctioned authority, competition requirements or contractual commitments.
Five-minute numerical checklist
Write units for every input. Convert carrying percentage to annual holding cost per unit when necessary. State whether safety stock is included. Keep purchase cost separate when constant across alternatives. Round operational quantities sensibly after completing the calculation.
Try a sensitivity test: if demand becomes four times as large, basic EOQ doubles, with other inputs unchanged. If holding cost becomes four times as large, EOQ halves. These relationships help detect arithmetic mistakes.
5 original practice questions
Attempt each question before opening its answer. These exercises are written for concept practice; they are not represented as official UPSC PYQs. Numerical assumptions apply only to the stated question.
Q1. D=10,000, S=200 and H=4. Basic EOQ equals what?
A. 1,000 units
B. 100 units
C. 10,000 units
D. 500 units
Show answer 1
A. 1,000 units The square root of 1,000,000 is 1,000.
Q2. ABC analysis uses which basis?
A. Unit price alone
B. Annual consumption value
C. Criticality alone
D. Movement alone
Show answer 2
B. Annual consumption value Annual usage multiplied by unit price gives value.
Q3. Which method identifies vital items?
A. HML
B. FSN
C. VED
D. Alphabetic filing
Show answer 3
C. VED VED is based on criticality.
Q4. Usage is 40/day, lead time 8 days and safety stock 100. Reorder point?
A. 320 units
B. 140 units
C. 800 units
D. 420 units
Show answer 4
D. 420 units 40 × 8 + 100 = 420.
Q5. Holding cost quadruples with other basic EOQ inputs unchanged. EOQ does what?
A. Halves
B. Doubles
C. Quadruples
D. Stays unchanged
Show answer 5
A. Halves EOQ varies inversely with the square root of H.
Frequently asked questions
What is the difference between EOQ and reorder point?
EOQ is order quantity; reorder point is the stock position triggering replenishment.
Does ABC classify items by unit price?
No. ABC uses annual consumption value. HML uses unit price.
Is safety stock included in Q/2?
No. Q/2 is basic average cycle stock.
Is JIT the same as zero risk?
No. JIT relies on dependable supply and can be vulnerable to disruptions.
Are the examples official PYQs?
No. They are original worked examples designed to teach the calculation patterns.
Sources and verification
Use the official text for the applicable date, organisation and recruitment. Source dates and compilation dates are identified where material. The worked examples and preparation plans are CrackTarget teaching content.
1. IGNOU: Inventory costs and EOQ
2. Department of Expenditure: procurement policy and manuals
3. UPSC recruitment-test question papers
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