Explain HML Analysis

HML Analysis: Criterion Employed – only unit price of the item.

Items are classified into three groups labeled as High – Medium – Low. The HML analysis is very similar to the ABC Analysis, the difference being instead of usage value, the price criterion is used. In their classification, the items used by the company are arranged in descending orders of their unit price. After this, the management of the company uses its discretion and judgment to decide the cut off lines for deciding the three categories. For example, the management may decide that all items of unit price value above Rs 500 should be categorized as H items, items whose, unit price falls between Rs 50 and Rs 500 should be categorized as M items and items whose unit price falls below Rs 50 should be categorized as L items. The categorization therefore is decided by the management.

HML analysis helps an organization to take decisions on the following:

a)      It helps to assess the security requirements and the type of storage for high priced items. For example, expensive ball bearings can be kept under lock and key in a cupboard.

b)      The frequency of stock checking is decided on the basis of the cost item. In other words, more expensive the item, more frequent will be its stock-checking.

c)      A control on purchases and buying policies can be exercised by the company. This means H and M items will not be ordered in excess of the required minimum quantity. However, in the case of L items, they may be purchased in bulk in order to avail the benefits of bulk purchase.