VED Analysis

Meaning of VED Analysis

VED analysis is an inventory management technique that classifies inventory based on its functional importance. It categorizes stock under three heads based on its importance and necessity for an organization for production or any of its other activities. VED analysis stands for Vital, Essential, and Desirable.

V-Vital category

As the name suggests, the category “Vital” includes inventory, which is necessary for production or any other process in an organization. The shortage of items under this category can severely hamper or disrupt the proper functioning of operations. Hence, continuous checking, evaluation, and replenishment happen for such stocks. If any of such inventories are unavailable, the entire production chain may stop. Also, a missing essential component may be of need at the time of a breakdown. Therefore, the order for such inventory should be beforehand. Proper checks should be put in place by the management to ensure the continuous availability of items under the “vital” category.

E- Essential category

The essential category includes inventory, which is next to being vital. These, too, are very important for any organization because they may lead to a stoppage of production or hamper some other process. But the loss due to their unavailability may be temporary, or it might be possible to repair the stock item or part.

The management should also ensure optimum availability and maintenance of inventory under the “Essential” category. The unavailability of inventory under this category should not cause any stoppage or delays.

D- Desirable category

The desirable category of inventory is the least important among the three, and their unavailability may result in minor stoppages in production or other processes. Moreover, the easy replenishment of such shortages is possible in a short duration of time.

VED Analysis

Importance of VED Analysis

It is of utmost importance to any organization to maintain an optimum level of inventory. Maintaining inventory has its costs, and hence, this analysis bifurcates inventory into three parts to help in managerial decisions on inventory maintenance. There are four types of costs to maintain stock which are:

Item cost

This is the cost or price of the inventory items. It is the actual purchase value of holding stock. Therefore, it will be high with more inventory and vice-versa.

Ordering / Set-up Cost

The purchase of inventory involves certain costs. These may include transportation charges, packing charges, etc.

Holding Costs

After the purchase of inventory items, there are a few costs too. These may be related to storage, insurance charges of stock or inventory, labor costs associated with the handling of stock, etc. Moreover, it includes any damage, leakage, or pilferage of the stock in hand.

Stock-Out Cost

These costs are the result of an inventory item running out of stock. It includes loss of production due to a spare part getting out of stock. Moreover, this may delay the product sale. Also, the product itself may get out of stock. Such losses are a part of the stockout cost.

VED analysis is a crucial tool for understanding and categorizing inventory according to its importance. Because of it, the management can optimize costs by investing more in the vital and essential categories of stock and lesser in the desirable category of inventory.

Usage of VED Analysis

Small and big organizations both widely use VED analysis. The most important application of this analysis is in maintaining medical inventory in hospitals and their drug stores. Drugs and related supplies comprise a significant portion of a hospital’s budget. Moreover, maintaining the right quantity of the right drugs is an extremely challenging task for management. While a shortage of critical medicine can lead to crises and even loss of lives, an abundance of non-important medications can lead to blockage of money and space or both.

VED analysis helps divide medicines into three categories as per their usage and importance. Therefore, medication in the vital group is to be kept in stock compulsorily, as they would be critical for patients. Medicines that are a bit less risky or which can be obtained from other sources too at short notice become part of an essential category. Those that are least critical and their shortage will not pose any danger to a patient’s health and lives get their place in the desired class. As a result, the hospital’s management can wisely allocate resources on medical inventory as per their respective VED categories.


Resources are always scarce for any organization, and thus optimum utilization of available resources is the key to success. Since costs related to maintaining inventory are high, it becomes the responsibility of the management to tackle these costs effectively. Scientific methods like VED analysis help maintain an optimum stock level without posing risks of shortages or non-availability of essential spares, parts, or products.

Continue reading Inventory Management Techniques.

Sanjay Borad

Sanjay Bulaki Borad

MBA-Finance, CMA, CS, Insolvency Professional, B'Com

Sanjay Borad, Founder of eFinanceManagement, is a Management Consultant with 7 years of MNC experience and 11 years in Consultancy. He caters to clients with turnovers from 200 Million to 12,000 Million, including listed entities, and has vast industry experience in over 20 sectors. Additionally, he serves as a visiting faculty for Finance and Costing in MBA Colleges and CA, CMA Coaching Classes.

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