How to do FSN Analysis to manage inventory?

An introduction

There are various techniques through which an entity may manage and control its inventory, one of which is FSN analysis. It categorizes inventory into three different classes, namely F, S, and N.

Not all items are required at the same time and with the same frequency, in every manufacturing industry. It is very much possible that some materials are needed on quite a regular basis, yet some others are needed only on rare occasions, while some others may have become outdated (or obsolete) and might not have been demanded in years. FSN analysis is an inventory management technique that helps to group these materials into 3 categories, i.e., Fast-moving, Slow-moving, and Non-moving (dead-stock) respectively.

FSN analysis plays a great role in assuring that the inventory policies and models adopted by a company for all these three categories are different. Materials that are required on a regular basis must be stocked frequently while obsolete materials must be disposed of quickly.

The main objective of this analysis is to assure that all inventory costs including material cost, labor cost, and turnover cost are minimized for a company as a whole.

Breaking down FSN Analysis

FSN analysis is the method of classifying materials based on their frequency of movement from inventory stores to production for a specified period.

All the items get segregated into three broad categories:

F for Fast-moving items,

S for Slow-moving items, and

N for Non-moving items

The categorization is made on the basis of consumption and the average stay of materials in the inventory store. The higher the stay of an item in the inventory, the slower would be the movement of such material. Such classification is also influenced by the nature of materials and managerial discretion.

Fast-moving = This is that category of inventory items that are placed nearer to the store issue point so that they are easily accessible whenever the need arises. The stock of these materials is reviewed frequently for the placement of fresh orders.

Fast-moving items are consumed quite frequently and have the highest replenishment rate.

Slow-moving = It represents that category of inventory items that are stored a little far and the stock is reviewed periodically for any obsolescence. These may be shifted to the Non-moving category.

These items move slower and their rate of replenishment is also slower than F-class items.

Non-moving = It represents that category of inventory items that are kept for disposal. These material items are reported to the management and an appropriate provision for loss may be created.

The non-moving items are those that are not consumed for a long period, say 24 months. These items tend to block quite a lot of capital and as such, they must be disposed of as quickly as possible before they deteriorate further.

How to do FSN analysis?

While performing this analysis, it needs to be taken care of that the turnover ratio of each material is to be calculated separately because all inventory items will be sorted and analyzed in response to the turnover ratio they possess. A threshold range is decided and items are then classified, on the basis of inventory turnover. In addition to the turnover rate, the annual demand and annual usage of materials are also a deciding factor.

Procedure to perform FSN analysis

FSN analysis is performed by following the steps below:

Step 1: Prepare a list of all inventory items and calculate their unit price, annual demand, and annual usage.

Step 2: Arrange the inventory items in the decreasing order of their annual usage.

Step 3: For each item of inventory, compute the percentage of annual usage & also the cumulative percentage of annual usage.

Step 4: Classify inventory items into F, S & N classes. The categorization is done on the basis of the cumulative percentage of annual demand.

For performing FSN analysis, we must have the following data pertaining to each inventory item:

  • Name,
  • Turnover ratio,
  • The annual demand of a particular item,
  • The unit price of each material,
  • Annual usage of each item, and
  • Cumulative annual usage of a particular item

The turnover ratio can be computed using this formula:

Turnover Ratio = Annual Demand/Average Inventory

After that, the annual usage of each inventory item is computed followed by the calculation of the percentage annual usage of each item of inventory.

The annual usage is computed using the formula stated below:

Annual Usage of each item = Annual Demand of each item x Unit Price of each item.

Thereafter, we compute the percentage cumulative usage of each item. This is computed using this formula:

Percentage Cumulative Usage of 1st item = Percentage Annual Usage of 1st item

Percentage Cumulative Usage of 2nd item = Percentage Cumulative usage of 1st item + Percentage Annual Usage of 2nd item

Once the above calculations are made, inventories are classified into 3 categories in the following manner:

F-class item

The inventory items whose stock turnover ratio is greater than 3 fall under this category. These are those items that are generally used on a frequent basis and are also consumed in large quantities. In a manufacturing concern, F-class items usually account for 10-15% of the different types of stock items used.

S-class item

These are those inventory items whose stock turnover ratio ranges between 1 and 3. The inventory items that fall under this category normally account for 30-35% of the different types of stock items used. When compared with F-class items, S-class items are not consumed in as large quantities as they are.

N-class item

The inventory items whose stock turnover ratio is below 1 fall under this category. N-class items usually account for 60-65% of the different types of stock items used. They represent dead items that are not used quite often.

To see how FSN analysis works, here is an example.

The following table shows an instance of implementing FSN analysis in a manufacturing plant:

FSN analysis

A list of 20 inventory items is penned down in the decreasing order of their annual usage. Inventory turnover rates are also computed for these items. 10% of the total inventory items that rank highest on the parameter of annual usage are put under the “F-class category”. They denote the items that have the maximum demand and are turned over into sales the maximum number of times. Thereafter, 30% of the total inventory items that are ranked in the middle are classified as “S-class category”. Lastly, 60% of the items that have the lowest annual usage are categorized as “N-class inventory”. Since they have the least demand, they must be disposed of as early as possible.

Keynote: The threshold range of inventory classification under FSN is subject to variation as per management’s decision and may differ from company to company.

The result of FSN analysis is summarized as follows:

FSN analysis result

FSN analysis on the basis of percentage annual usage:

FSN analysis

87.95% usage of inventory is that of F-class. They are consumed the most.

FSN analysis on the basis of %item used:

FSN analysis

Only 10% of the total stock items are fast-moving. Only such items are required to be held regularly and move in and out of stock fastest and most often.

What could be the reasons for slow-moving and non-moving inventory?

Some of the reasons that contribute towards the slow-moving and non-moving stock of inventory can be:

  • Sometimes, the production department of a company may fail to communicate to the Stores department the updated or modified requirements of raw materials needed in manufacturing. This may happen due to a change, improvement, or refinement in production processes or diversification in the range of products offered to customers. The storage of materials that are no more required in the production process would, therefore, unnecessarily increase the company’s costs. Hence, systematic communication across all departments is extremely essential to reduce operational costs and improve production efficiency.
  • Lack of periodic review of inventories may result in non-detection of those not required for planned production and whether obsolete materials continue to occupy storage space until removed from stores.
  • If there is technological up-gradation in terms of a new machine requiring a new kind of material or existing material becoming obsolete, it may again lead to unwanted stocks being stored in abundance.

By close monitoring, prompt detection, and adoption of inventory management strategies such as maintenance of minimum level or just in time approach, one can manage slow-moving and non-moving inventories. One may measure inventory turnover ratio and present the reports of comparison of actual and standards with variations, if any, to the management.

Did you know?
FSN analysis is also known as FNS (Fast, Normal, and Slow-moving) classification of inventory items.

How does FSN Analysis help?

FSN analysis – categorizes materials on the basis of inventory turnover or rate of consumption. The classification of inventory under FSN analysis helps in the proper arrangement of stocks in stores and aids in distribution and handling methods. It is a tool of inventory control.

This analysis assists the storekeeper or purchase department of a corporation in ensuring that fast-moving items are always kept available & non-moving inventory items are quickly disposed of.

Since fast-moving items are actively reviewed in FSN, it helps make smarter purchase decisions from suppliers and keeps inventory relevant to demand. Similarly, it also tracks dead items which are no longer necessary to keep in stock. This streamlines the procurement and supply of raw materials so as to obtain good quality output at the minimum cost of materials.

The table below summarizes some of the characteristics of FSN analysis:

ParticularsF-class itemsS-class itemsN-class items
Amount of Stock keptHighIntermediateLow
Inventory Control requiredHighIntermediateLow
Check on InventoryTightIntermediateNo
Safety stock to be keptHighLowRare

Takeaway

Under this system, inventories are controlled by classifying them on the basis of the frequency of usage of items of inventory. The management can identify dead stock which is not moving at all and dispose it of. Once slow-moving and non-moving items are identified, they can be bought just in limited quantities to avoid extra purchases from the next time. On similar grounds, by using FSN analysis, a company would be able to effectively allocate monetary resources towards fast-moving items and avoid blocking money in slow and non-moving items.

In addition, this analysis helps in the proper placement of inventories. For example, fast-moving items could be placed in a location that is easily accessible.

Hope the information provided in this blog proves helpful to you!

Also read: Difference between traditional costing and activity-based costing – Which is better?

What is activity-based costing? – Meaning and suitability

Zero-based budgeting – How to implement it!

What is Target costing? – An overview and application

Ruchi Gandhi

The author enjoys to write informational content in the domain of company law and allied laws. She takes interest in doing thorough and analytical research on legal topics. She is a CA along with MBA (Fin) and M. Com.

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2 thoughts on “How to do FSN Analysis to manage inventory?

  1. Hi thanks for valued info.

    Would you tell me how i can calculate the average inventory and in which basis should i calculate . Please advice

    1. Hi,
      To calculate average inventory for each inventory item, you may add up the inventory amounts at the end of each month and divide that total by 12. Else, you may add up opening and closing inventory and divide that total by 2. Thanks

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