FSN ANALYSIS TECHNIQUE- “A perfect analysis to categorize current Inventory based on inventory turnover rate”
In today’s modern era, trends and liking of consumers changes even before industries are able to predict and analyze. For any business to survive efficiently in this competitive environment, staying updated with trend changes and predictions on demand becomes one of many mandatory tasks. Moreover, to possess optimum profit, an increase in sales is not only the point of concern. Especially for businesses in the Inventory field, cost because of transportation, cost of preserving stock in warehouses, for consumable products - not being out of date, are all the factors also responsible for maintaining an optimum profit.
Though industries provide the best quality products and sales are also high, if industries fail on analyzing the inventories based on usage, variability in demand, revenue generation and many such parameters then unnecessary cost increases because of unnecessary transportation in replenishment, unnecessary stock in a warehouse which is not based on demand which at the end leads to degradation of profit margin.
Thus, we do not have any option to accept the bitter truth that Industries with good demand forecasting and other such Inventory Management techniques will definitely overtake industries supplying good quality products but possessing flawed demand forecasting abilities.
Why FSN Analysis?
There is simple logic. What is the use of possessing the best quality products but not being able to supply on time as you are unaware of demand?
How about if you know the usage frequency of each inventory in your business and thus based on usage frequency value replenish the stock? Obviously, unnecessary replenishment is avoided as now you know how much to replenish.
By implementing such practice not only is unnecessary replenishment cost avoided but time is also saved and thus now you can use manpower and other resources also most efficiently.
This is only possible if a business is implementing such technology which helps them to gain knowledge about the usage of inventories.
Whether online or offline business, no one wishes to invest money in holding inventories that do not bring in revenues frequently.
"Classifying Inventories based on usage frequency is a must”
Thus we can say that It is of great help if there is available such Inventory technology which when implemented in business helps it to classify inventories based on their usage frequency.
FSN analysis is one such inventory method that helps to identify inventories based on usage frequency.
What is FSN Analysis?
Abbreviation of FSN - Fast-moving, Slow Moving, Non-moving Inventories.
As the name says, FSN analysis helps to classify inventories based on their usage frequencies, consumption rates, quantity, and the rate at which Inventory is used.
This inventory management technique helps to analyse inventories based on their movement, and frequency of transactions.
The fast-moving category as the name suggests comprises inventories whose consumption frequency is the highest among all inventories in the catalogue thus its movement is fast and needs to be replenished very often.
The slow-moving category as the name suggests comprises inventories whose consumption frequency is slow among all inventories in the catalogue and thus its movement is slow and needs to be replenished sometimes or very less number of times.
Non-moving category as the name suggests comprises inventories which are least consumed among all inventories in the catalogue, also includes headstock, and replenishment of such inventory may or may not take place at all.
Thus we can say that FSN analysis is especially useful to identify obsolete items in the catalogue.
Knowing what FSN analysis is, now the point of interest switches to knowing how actually the inventories are classified into the FSN category.
Steps to categorize inventories based on FSN analysis
The basic principle used to classify inventory based on FSN analysis states that:
- The transaction issues of N inventory for a selective period of the user's choice are considered.
- A number of transaction issues are decided to set boundaries for analysis.
- For example,
For inventories with no transaction issues, they are categorized as “N” i.e. Non Movable items.
For inventories with 10-15 issues in the selected period, they are categorized as “S” i.e. Slow Moving item.
For inventories, a number of issues exceeding this limit for a selected period, are categorized as “F” i.e. Fast Moving items.
Here the period of consideration and limit for a number of issues vary for different organizations based on their analysis requirement.
A method implemented to categorize inventory into F, S, N :
Using basic principles, FSN analysis when used for real implementations it makes use of a few parameters
In the FSN inventory management analysis technique implemented, the stock turnover ratio is used to classify inventories.
Step 1: The stock turnover ratio is calculated by the ratio of consumption of an inventory of material and its average inventory.
Step 2: Decide parameter to classify inventory into FSN category
Inventories in “F” category → Include those Items whose stock turnover ratio calculated in step1 is greater than 3
Inventories in “S” category → Include those Items whose stock turnover ratio calculated in step1 is between 1 and 3.
Inventories in “N” category → Include those Items whose stock turnover ratio calculated in step1 is below 1.
From inventories in FSN analysis, we can interpret that
Items included in F category are fast-moving, stating among all inventories in a catalogue, these are the inventories consumed highest and their stay is very less.
Items included in S category are slow-moving, stating among all inventories in catalogue consumption of these inventories is moderate and their stay is more.
Items included in N category are Non-moving, stating among all inventories in a catalogue, these are the inventories not consumed at all and their stay is permanent as these inventories are not issued at all for a selected period of time. Inventories in this category can be considered deadstock
- It helps businesses to invest in fruitful products as this analysis helps to identify the consumption rate of all products, and thus invest in the highest consumable products.
- It helps to arrange stock in stores based on consumption rate and their distribution and handling methods
- It helps to identify and take necessary actions on obsolete items.
- It helps to gain knowledge about the behaviour of products in a supply chain.
- It helps to decide the future of products in business and also to decide whether to increase the purchase of products or not?
- It helps to find the active products in your catalogue.
- It helps to view the trend change cycle shifting from one product to another if the analysis is carried out regularly.
- It helps to gather information about changing trends and thus keep inventories updated to maintain the supply chain.
- It helps to optimize the profit of the business as by implementing this analysis, you can avoid unnecessary inventory carrying costs, as now you can identify non-moving products and take necessary steps to get rid of these products.
- It also helps to take necessary actions to keep fast-moving products at the location easiest for access in the warehouse and thus again reducing unnecessary replenishment costs and again maintaining optimum profit in business.
As this analysis is based on calculations and formulas, a single human error can flaw the calculations, and thus the analysis of inventories based on consumption frequencies goes wrong.
This may lead to wrong decisions on investing in inventories based on consumption frequency and you might invest in the wrong products.
Also, fluctuations in demand may also lead to skewed and inaccurate analytical decisions.
This is because it may happen that products which were under Fast moving items last year may have now in the real world turned into slow-moving or non-moving items.
In this method of analysis consumption during past time is taken for calculation and if the real world demand has changed than that of the time you selected then there's a conflict between your analysis suggestions and real demand.
In this analysis, there is a continuous watch over the last date of issue of the item, thus it lets you know how much time has actually passed since the last transaction.
Thus it lets you know unnecessary inventory storage costs also if there is no movement of products since a long time ago.
FSN analysis helps you to segregate inventories based on consumption frequency, and based on frequency can easily figure out the demand and movement of inventories.
Also, decisions on location and quantity of inventory to store can also be discussed.
Using this analysis, forecasting inventories can be done effectively.
Avoid minor errors also to avoid misunderstanding about replenishing stock based on consumption.
Solely depending only on FSN analysis may lead to over-stocking and subsequently resulting in dead stock and thus blockage of money and storage space and resources.
Businesses need to be careful of seasonal products whose demands shift within a short period of time. XYZ analysis classifies inventories based on variability in demand.
Hence one such analysis technology important to know is XYZ with FSN classification.
With advances in technology and knowledge, business uses ABC analysis, VED analysis and other such relevant inventory analysis technology also along with FSN analysis.
Obviously, as all this analysis is not done manually which is impossible looking at a large number of products in a catalogue, inventory management software is implemented.