Inventory control encompasses all aspects of managing a business’ inventory stock, from purchasing, shipping, receiving, tracking, warehousing and storage, turnover, and reordering. Inventory control is such a critical function for many businesses spanning every industry. Without effective inventory control methods, the supply chain can suffer, you risk not being able to meet customer demands adequately, and your business’ bottom line will reflect this. The SDE analysis is considered a common inventory control and optimisation method. This is just one of many optimisation methods that are used to take into account variations in demand and supply, and replenishment parameters to determine how much inventory to hold in order to safeguard against such variations.
What is an SDE analysis?
This analysis classifies inventory on three different levels, based on the availability of items.
S – scarce, refers to generally imported items that require longer lead times and often are in short supply. For example, imports of goods are subject to government stringent regulations and ultimately slows down the procurement process.
D – difficult, refers to items that are often available domestically but are difficult items to procure. For example, items that generally come from far cities or where reliable suppliers are difficult to find. The general rule of thumb for this classification is if the inventory stock requires more than a fortnight to be available, but less than six months lead time it should be classed as difficult.
E – easy, refers to items which are freely available, that are often procured quickly and locally, relatively hassle-free.
Why is SDE analysis used?
Using an SDE analysis to classify your inventory stock is a simple yet effective method that can help improve your business policies for better inventory control. By determining whether an item is scarce, difficult or easy will help guide your business to overcome problems faced in procurement.
Should your business be valuing inventory stock this way?
The SDE analysis is commonly used to allow for better planning when procuring inventory stock. By classifying items into these categories it enables your business to easily take into account of more problematic lead times, focusing your attention and resources there so you can prepare in advance. Also, when using the SDE analysis, it can also be used to inform your purchasing strategies for the better.
Although this analysis can certainly help get a clearer snapshot of inventory, it does not provide in-depth insight. It can help guide planning at a surface level, but products in the same category may have inherent different procurement characteristics. For example, item A and B are both classified under D for difficult, however, item A can be acquired in 4 weeks, whereas item B takes 4 months. Therefore, this analysis shouldn’t really be used by itself to plan procurement down to a tee. There is still a need for communicating with each supplier so items can be individually managed accurately, however, best practices involve sophisticated inventory management systems and smarter processes to overcome this drawback.
Topics: inventory control, inventory stock, inventory valuation