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CHAPTER-I

INTRODUCTION

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INTRODUCTION TO INVENTORY

The materials means and includes the goods an services being sold by the firm and the raw

materials are other components being used in the manufacturing of such goods and services.

A retail shop keeper keeps an inventory of finished goods to be offered to customers when

ever demanded by them. On the other hand, a manufacturing concern has to keep a stock pile

of not only the finished goods it is producing, but also of all physical ingredients being used

in the production process.

“inventories are assets of the firm, and as such they represent an investment. Because such

investment requires a commitment of funds, mangers must ensure that the firm maintains

inventories at the correct level. If they become too large, the firm loses the opportunity to

employee those funds more effectively. Similarly, if they are too small, the firm may lose

sales. Thus, there is an optimal level of inventories and there is an economic order quantity

model for determining the correct level of inventory.”

DEFINITIONS:

Inventories are the “stock of the product, a company is manufacturing for sale and the components that make up the product.”

An inventory can also defines as, “a stock of goods which must be carried out in order to ensure smooth and efficient running of business”.

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NEED FOR THE STUDY:

There has been an increase in net profit, gross margin, gross profit gross sales,

internal resources generation, export earnings & contribution to the exchequer 04. A detailed

analysis of the public sector, industry wise profitability, reveals that 50% of the PSUS are

loss making and another 50% are highly profitably like SAIL, GAIL, BALCO, HPCL &

BHEL.

The main reason attributed for loss making in financial in discipline in managing the

resources particularly in inventory management.

For an organization, the product profitability considering standards and budgets is of

paramount importance need less to say that in this context, inventory management assumes

lot of significance. It is observed that most of the public sectors are in losses due to holding

of huge inventories and became white elephants for the Govt. as such an attempt has been

made to study the inventory management with reference to ZUARI

Inventory management software helps create invoices, purchase orders, receiving

lists, payment receipts and can print bar coded labels. An inventory management software

system configured to your warehouse, retail or product line will help to create revenue for

your company. The Inventory Management will control operating costs and provide better

understanding.

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TYPES OF INVENTORY

RAW METERIAL WORK IN PROGRESS FINISHED GOODS

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REJECTED APPROVED

IN-PROCESSRejected

Approved INTERMEDIARIES

Rejected Approved SEMI-FINISHED

GOODS Rejected

Approved

REJECTED APPROVED

OBJECTIVES OF PROJECT STUDY:

Inventory management in public sector under taking assumes lot of significance. This work become more complex when there are number of products division and less common, items of inventory.

It is observed that generally PSUS in some cases, are loaded which high volumes of inventory leading to obsolescence with consequent charging to profit / loss a/c resulting in reduction of the profits. Non-moving and obsolete inventories would affect liquidity and result in blockage of funds there by drastically affecting the performance of an organization.

In the backdrop of above, it is proposed to take a project study on inventory management in a leading public sector – ZUARI,. The above study is aimed at analyzing the inventory management practices prevalent in ZUARI

This is to followed by critical analysis and assessment of performance on this by company. At the end of the project work it is proposed to sum up providing conclusions, making suggestion for improvement.

Analysis of the performance would focuses on application of standard tools of measurement like turnover ratios etc., to trend analysis and structural analysis.

SCOPE AND METHODOLOGY:

The project report on inventory management covers collection of data, analysis of the data, interpretations @ suggestions.

Inventory statements are prepared on the basis of the financial statement of ZUARI

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LIMITATIONS:

As stated else where, ZUARIis under a strategic ministry of Government of India dealing with Nuclear power, defense, and etc. the very nature of the organization place certain limitation on the collection of the data and analysis there of . It was not possible to collect total information.

PERIOD OF STUDY:

The proposed project study will cover financial five years. Depending upon the data availability.

METHODOLOGY:

For the preparation of a project the collection of data is very essential. They are primary data @ secondary data.

SOURCES OF DATA:

Primary data

Secondary data

Primary data:From direct personnel and oral investigation.

Secondary data:

The secondary data is obtained from the 1. Annual reports of the unit.2. Other reports of unit.3. Broachers 4. house magazines of the unit and 5. Internet.

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CHAPTER-II

REVIEW OF LITERATURE

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PRESENT SCENARIO OF INVENTORY MANAGEMENT

IN INDIA

The success of a venture depends on its ability to provide services to customers or users

and remain financially viable. For an organization which is supplying goods to its customers, the

major activity is to have suitable products available at an acceptable price within a reasonable

timescale. Many parts of a business are involved in setting up this situation. Initially these are the

marketing and design departments. Then purchasing, and in some cases, manufacture is involved.

For an item, which is already in the marketplace, the main activity is providing a continuity of

supply for the customers.

Inventory control is the activity, which organizes the availability of items to the

customers. It co-ordinates the purchasing manufacturing and distribution functions to meet

the marketing needs. This role includes the supply of current sales items, new products,

consumables, spare parts, obsolescent items and all other supplies.

Inventory enables a company to support the customer service, logistic or

manufacturing activities in situations where purchase are manufacture of the items is not able

to satisfy the demand. Lack of satisfaction could arise either because of the speed of

purchasing or manufacturing is to protected or because quantity cannot be provided without

stocks.

Stock control exists at a cross roads in the activity of a company.

Many of the activities depend on the correct level of stock being held. but the definition of

the term “correct level” varies depending open which activity is defining the stock. Stock

control is definitely balancing a act between the conflicting requirements of the company,

and the prime reason for the development of the inventory management to resolve this

conflicting best interest of the business. A conventional supply organization will have many

departments including sales, purchasing finance, quality assurance, contracts and central

administration. In some cases there will also be manufacturing, distribution or support

services or a variety of industry specific active. Each of these has a particular view of the

role of stock control.

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Sales consider that stock control enables the company to have available any item,

which will meet immediate sales for as demanded this requires large stock. For

manufacturing companies where parts manufacturing are involved, the control of stock at the

customer interface is traditionally left with the person carrying out the manufacture, and this

has led to overstocking and poor control. Similarly compromise has to be reached. Inventory

control keeps balancing conflicting requirements.

Finance departments have a problem with stock because it consumes vast amounts of

working capital and upsets the cash flow. One benefit of stock from a financial standpoint is

that provisions can be made in case the stock turns out to be unassailable, and this value can

be adjusted to modify the profit figure in terms of good or bad financial results. However, the

existence of these provisions in the first place is detrimental to the finances of the company.

Quality management normally has the effect of slowing down the progress of stock while

the necessary checks are made. This means that quality and inventory personnel effectively work

in opposition. The gradual introduction of formal quality standards for supply and manufacture

has reduced this conflict in most organizations. Supplier conformance has been improved

enabling intrusive checking to be minimized.

General management sees stock control, rightly, as a source of information. Some

managers consider that they should be able to use stock control to give an immediate supply

information, statistics and forecasts. This can result in large amounts of unstructured work

collecting, analyzing and providing information.

The traditional view of manufacturing companies like ZUARI has been that large

batches reduce the direct production costs. Manufacturing management tends to aim more

for plant and labor efficiency and allow high stocks in order to avoid the disruptions caused

by shortages, breakdowns and changing customer demand.

The responsibility for maintains gig the correct balance is normally left to inventory

management. Demand for the product results from changes in market and financial forces

and the amount and type of stock control varies. Stock control is a kept right. This requires

both communications skills and professional inventory techniques. Operating methods

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should be continuously revised to reflect the changes and systems should be altered to suit

new situations and operating policies.

CHAPTER-III

COMPANY & INDUSTRY PROFILE

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Italcementi Group History

Founded in 1864, Italcementi was quoted for the first time on the stock markets, at the Milan

Stock Exchange, in 1925, under the name of “Società Bergamasca per la Fabbricazione del

Cemento e della Calce Idraulica” and has been operating since 1927 under the name of

Italcementi Spa.

Zuari Cement is part of the Italcementi Group, the fifth largest cement producer in the world

and the biggest in the Mediterranean region. With net sales over 6 billion Euros in 2009 and a

capacity of 70 million tonnes. Italcementi Group combines the expertise, know-how and

culture of a number of companies from more than 22 countries in 4 continents. This includes

an industrial network of 63 cement plants, 15 grinding centres, 5 terminals, 134 aggregates

quarries and 613 concrete batching units. In India, with its inherent strengths, Italcementi

Group's Zuari Cement is committed to give the building industry a cement that is truly

international. 11

A commitment to customer satisfaction has seen Zuari Cement grow from a modest 0.5

million tonne capacity in 1995 to 3.5 million tonne today. Zuari Cement is in the process of

increasing this capacity to 6 million tonne by 2009 through setting up of a new 5500 tonne

per day clinker line at Yerraguntla and a grinding center at Chennai. A captive power plant

with a capacity of 43 MW has already been set up at the Company's cement manufacturing

facility at Sitapuram.

With a 6% market share in the south Indian cement market and sales of about Euro 188

million in 2009, Zuari Cement has chalked out ambitious plans for the future. This includes

strengthening its presence in the Maharashtra, Orissa and West Bengal markets. While

technology is just one of its strengths, there are many other factors that contribute equally to

Zuari's success. These include a high-level organisation and decentralised quality assurance

teams to guarantee the full compliance with the customers' expectations.

Our History

Strong foundations for a company of strength.

Zuari entered the Cement business in 1994 to operate the Texmaco Cement Plant. In 1995,

Texmaco’s Plant at Yerraguntla was taken over by Zuari and a Cement Division was formed.

The fledging unit came into its own in the year 2001 when Zuari Industries entered into a

Joint Venture with the Italcementi Group, the 5th largest producer of Cement in the world ,

Zuari Cement Limited was born. Zuari Cement took over Sri Vishnu Cement Limited in

2002. Today, the Company is amongst the topmost cement produces in South India.

Zuari and Italcementi. The strength of two

Zuari Cement is one of the leading cement producers in South India.A fully owned

subsidiary of the Euro 6 billion Italcementi Group, Commitment to customer satisfaction has

seen Zuari Cement grow from a modest 0.5 million tonne capacity in 1995 to 3.5 million

tones today.And earned a place among the most reliable cement producers in the country.

Thanks to a careful plan of investments and take-overs of other cement producers, the

company expanded, quickly reaching a strong position on the market and becoming the

leading cement manufacturer in Italy.

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After several acquisitions abroad, in 1992 Italcementi achieved important international status

with its take-over of Ciments Français, one of the main global cement producer.

In 1997 Italcementi consolidated its verticalisation strategy with the acquisition of

Calcestruzzi, thus becoming Italian leader in the ready-mixed concrete sector.

In March 1997, all the international companies of the Group gathered under one single

corporate identity.

Since 1998 Italcementi Group has been pursuing its internationalisation strategy by acquiring

new cement works in Bulgaria, Kazakhstan, Thailand, Morocco, India, Egypt and the United

States.

Our Management:

While professional management and quality workforce ensure superior results, the role

played by the core management should not be discounted. With their vision and experience,

they make sure that Zuari Cement moves in the right direction. Towards becoming one

among the leading cement producers in India.

Maurizio Caneppele

Managing Director

Curriculum vitae

Krishna Srivastava

Director Marketing

Ramesh Surya Narayana

Director Technical

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http://www.zuaricements.com/NR/rdonlyres/94F5C380-2CDB-4F50-98FE-B148D2F94F40/17772/MDS_PROFILE.pdf

Curriculum vitae

Emiliyan Andreev

Chief Financial Officer

Curriculum vitae

S.SURESH

Vice President HR & IR

With an annual production capacity of approximately 70 million tons of cement,

Italcementi Group is the world’s fifth largest cement producer.

The Parent Company, Italcementi S.p.A., is one of Italy’s 10 largest industrial companies

and is included in S&P/MIB Index of the Italian Stock Exchange.

Italcementi Group’s companies combine the expertise, know how and cultures of 22

countries in 4 Continents boasting an industrial network of 63 cement plants , 13 grinding

centres , 5 terminals , 125 aggregates quarries and 614 concrete batching units .

In 2009 the Group had sales amounting to

almost 6 billion Euro.

Italcementi, founded in 1864, achieved

important international status with the take-over

of Ciments Français in 1992.

Following a period of re-organization and

integration that culminates in the adoption of a single corporate identity for all Group

subsidiaries, the newly-born Italcementi Group began to diversify geographically through a

series of acquisitions in emerging countries such as Bulgaria, Morocco, Kazakhstan,

Thailand and India, as well as operating in North America. As part of the plan to further

enhance its presence in the Mediterranean area, in 2005 the Group boosted its investments in

Egypt becoming the market leader.

In 2007 Italcementi acquired full control of the activities in India and signed an agreement to

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http://www.zuaricements.com/NR/rdonlyres/94F5C380-2CDB-4F50-98FE-B148D2F94F40/17766/CFOS_PROFILE.pdf

http://www.zuaricements.com/NR/rdonlyres/94F5C380-2CDB-4F50-98FE-B148D2F94F40/17765/DT_profile.pdf

strengthen its position in Kazakhstan while, in 2008, it further strengthened its presence in

Asia and the Middle East through the operations in China, Kuwait, Saudi Arabia. In 2009 the

Group signed a joint venture in Libya to build a 4 million tons/year cement plant.

As a member of the World Business Council for Sustainable Development (WBCSD)

Italcementi Group has signed the Cement Sustainability Initiative’s Agenda for Action, the

first formal commitment that binds a number of world cement industry leaders to an action

plan that aims at satisfying present-day needs at the same time as safeguarding the

requirements of future generations.

To further confirm its commitment on these issues, the Group has taken over the co-

Chairmanship of the Cement Sustainability Initiative for the period 2010-11.

Our Products

Cement for every kind of task

Zuari Cement manufactures and distributes its own main product lines of cement .We aim to

optimize production across all of our markets, providing a complete solution for customer's

needs at the lowest possible cost, an approach we call strategic integration of activities.

Cement is made from a mixture of 80 percent limestone and 20 percent additives. These are

crushed and ground to provide the "raw meal”, a pale, flour-like powder. Heated to around

1450° C (2642° F) in rotating kilns, the “meal” undergoes complex chemical changes and is

transformed into clinker. Fine-grinding the clinker together with a small quantity of gypsum

produces cement. Adding other constituents at this stage produces cements for specialized

uses.

Blended Cements

Zuari Blended Cement the eco-friendly, user-friendly cement

Zuari Blended Cement has been developed in response to today’s need for environment-

friendly products that are cost-effective, durable and have minimal by-products.

Durability is a very important property in concrete. And durability here means concrete that

ensures the long life span of structures like homes and residences that are lifetime

investments. Since distress of concrete and early failure of structures is a common

phenomenon, research over a period of time helped develop various remedial measures that

improved durability and cost economics. One of them being blended Portland Cement, with 15

















complementary pozzolanic and cementitious materials like fly ash, blast furnace slag, etc.

And Zuari Blended Cement is a fine example of it.

Our Products

Portland Cement

Zuari OPC is a high quality cement prepared from the finest raw material. Owing to

optimum water demand, it contributes to a very low co-efficient of permeability of the

concrete prepared. This improves the density of the concrete matrix and increases the

durability of the concrete. Zuari OPC is a high performance cement far exceeding the codal

requirement of BIS.

It is this very durability that translates into long - lasting residential and commercial

constructions of a wide variety.

Zuari’s edge

With these unique advantages, Zuari Cement comes to you in two grades - 43 Grade OPC

and 53 Grade OPC.

Zuari OPC is a high quality cement prepared from the finest raw material. Owing to

optimum water demand, it contributes to a very low co-efficient of permeability of the


durability of the concrete. Zuari OPC is a high performance cement far exceeding the codal

requirement of BIS.

It is this very durability that translates into long - lasting residential and commercial

constructions of a wide variety.

Zuari 43 & 53 Grade Ordinary Portland Cement (OPC) - Strong cements for

longlasting constructions.

Higher compressive strength

Better soundness

Lesser consumption of cement for M-20 grade concrete and above

Faster deshuttering of form work

Reduced construction time

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Primo Concrete Cement - Concrete Redefined

Primo - The success story

In 2008 Zuari Cement launched its high-strength cement under the brand name 'Primo

Concrete Cement' in Bangalore City. 'Primo' improves the density of the concrete matrix

and increases the durability of the concrete, making it an immediate hit among construction

and infrastructure projects undertaken in and around Bangalore. Recently Primo was also

launched in Kochi and Chennai. An extensive marketing and distribution network across

south India concretes Zuari Cement's success story.

New products, on the line of the extremely successful 'Primo' launch, will play a significant

role in key markets.

Primo Concrete Cement - Concrete Redefined

Primo concrete cement is a high quality cement prepared from the finest raw material. Owing

to optimum water demand, it contributes to a very low co-efficient of permeability of the


durability of the concrete. Primo is a high performance cement far exceeding the codal

requirement of IS 12269-1987. It is this very durability that translates into long-lasting

residential and commercial constructions of a wide variety, such as dams,canals, highways,

roads and flyovers.

Higher compressive strength

Better soundness

Lesser consumption of cement for M-20 Concrete grade

and above

Faster deshuttering of form work

Reduced construction time

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CHAPTER-IV

A BRIEF DESCRIPTION OF VARIOUS TECHNICAL ASPECTS AND TERMS IN INVENTORY

MANAGEMENT

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A BRIEF DESCRIPTION OF VARIOUS TECHNICAL ASPECTS AND TERMS IN INVENTORY MANAGEMENT

MPACT OF INVENTORY ON WORKING CAPITAL

Inventories are a component of the firm’s working capital and, as such, represent a current asset

1. A CURRENT ASSET: It is assumed that inventories will be converted to cash in the current accounting cycle, which is normally one year.

2. LEVEL OF LIQUIDITY: Inventories are viewed as a source of near all cash. For most products, this description is accurate, at the same time; most firms hold some slow moving items that may not be sold for a long time. With economic slows down or changes in the markets for goods the prospect for sale of entire product lines diminished. In these cases, the liquidity aspects of inventories become highly important to the manager of working capital. At the minimum the analyst must recognize that inventories are the least liquid of the current assets.

3. LIQUIDIERY LAGS: inventories are tied to the firms pool of the working capital in a process that involves three specific lags.

Creation lags : In most cases, inventories are purchased on credit, creating an account payable. When the raw materials are processed in the factory, the case to pay production expenses is transferred at future times. Whether manufactured or purchases, the firms will hold inventories for some period before payment is made. This liquidity lag offers a benefits to the firm.

Storage lags: Once goods are available for resale, they will not be immediately converted into cash. First the items must be sold. Evenly when sale are moving briskly, a firm will hold inventory as a backup. Thus the firm will usually pay suppliers, workers and overhead expenses before the goods are actually sold. This lag represent a cost to the firm.

Sale lag: once goods have been sold, they normally do not create cash immediately. Most sales occur on credit an become accounts receivable. This lag also represents a cost to the firm.

4. CIRCULATING ACTIVITY: Inventories are in rotating pattern with other current assets. They get converted in to receivables which generate cash is invested again in inventory to continue the operate cycle.

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NATURE OF INVENTORIES

Inventories are stock of the product, a company is manufacturing for sale and components that makeup the product. The various forms in which inventories exist in a manufacturing company are : Raw material, work in progress inventory and finished goods

1. Raw materials: The raw material include the materials, which are used in the production process and every manufacturing firm has to carry certain stock of raw materials in stores. These units of raw material are regular issued to transfer to production process is not interrupted by storage of these materials.

2. Work-in progress: It refers to the raw materials engaged in various phases of production process. The degree of completion may be varying for different units some units may be 40% finished, or some other 90% completed. The value of work progress involves material costs, the direct wages and expenses already incurred and overheads if any. So, work in progress inventory contains partially produced or completed goods. The purpose of work in progress inventory is to uncouple the various operations in the production process, so that machine failures and stoppage in operation will not affected by one another.

3. Finished goods: In trading firm purchase are made where as in the manufacturing firm produced or process the goods. However, it may be. These are goods that are either being purchased by the firm or are being produced or processed in the form. These are just ready for sale to customer. Inventory of finished goods arise because of the time involved in production process and to meet customers demand promptly. If the firms do not maintain a sufficient finished goods inventory, they run the risk of losing sales due to customer dissatisfaction. The purpose of finished goods inventory is to uncouple the production and sale can made directly out of inventory.

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NEED TO HOLD INVENTORY

Maintaining inventories involves typing up of the company’s funds and incurrence of storage and handling cost. There are three general motives for holding inventories:

1. Transactionary Motive: Every firm has to maintain some level of inventory to meet the day to day requirements of sale, production process customer demand etc. transactionary motive makes the firm to keep the inventory of finished goods as well as raw materials. The inventory will proved smoothness to the operations of the firm. A business firm exists for business transaction that require stock of goods and Raw materials.

2. Precautionary motive: A firm should keep some inventory for unforeseen circumstances also. The firm must have inventories of Raw materials as well as finished goods for meeting any emergencies.

3. Speculative Motive: the firm may be tempted to keep some inventory in order to Capitalize an opportunity to make profit e.g., sufficient level of inventory may help the form to earn extra profit incase expected shortage in the market.

MAIN PURPOSE OF INVENTORY

The purpose of holding inventories is to allow the firm to operate the processes of purchasing, manufacturing and marketing in its primary products. The goal is to achieve efficiencies in are where costs are involved and to achieve sales at competitive prices in the market place.

1. Avoiding Loss Sales: Without goods on hand that are ready to be sold most firms would lose business. Some customers are ready to wait, particularly when an item must be made on order or is not widely available from competitors. A firm must be prepared to deliver goods on demand. Shelf stock refers to items that are stored by the firm and sold with little or no modifications to the customers.

2. Gaining quantity Discounts: inurn for making bulk purchases many suppliers will reduce the price of supplies and component parts. These discounts will reduce cost of goods sold and increase the profits earned.

3. Reducing order Cost: Each time a firm place an order it incure certain expenses. Forms have to be completed, approvals have to be obtained and good that arrive must be accepted, inspected and counted. Later an invoice must be processed and

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payment made. Each of these costs will vary with the order placed. By placing fewer orders the firm will pay less to process each order.

4. Achieving Efficient Production Runs: Each time a firm sets up workers and machines produce an item startup cost are incurred. These are the absorbed as production begins. The longer the run the smaller the costs to begin producing the goods.

5. Reducing Risk of Production Shortages: Manufacturing firms frequently produce goods with hundreds or thousands of components. If any of these are missing entire production operation can be halted with heavy expenses. To avoid starting a production run and then discovering the shortage of a vital raw material or other component, the firm can maintain larger than inventories. Basically, inventory management is the concern of stores management, production management and sales management. In case of raw materials, the stores management and production management is concerned. In case of finished goods, production and sales management is concerned.

ESSENTIALS OF INVENTORY CONTROL:

1. Standards form of requisitions, order, issue transfer of material from on job to the other and transfer of material from the job to the stores should be used.

2. Minimum, maximum and re-ordering levels for each type of material should be fixed to ensure that there is no storage of materials and that there is no over-stocking.

3. Adequate records to control materials during production should be maintained to ensure that there is minimum possible wastage.

4. The storage of materials should be well planned to avoid losses from theft, carelessness, damage deterioration, evaporation and pilferage.

5. A system of internal check should be checked by properly authorized and independent persons.

MANAGEMENT OF INVENTORY: Store is an important department in any production workshop. Inventories constitute a major element of total working capital and it is stated that goods inventory management is good management. Inventory management involves large numbers of issues such as fixing levels of inventories, size of inventory to be carried on issue pricing policy, inspection procedure order quantity, storage facilities and effective information system.

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OBJECTIVES OF INVENTORY MANAGEMENT

The basic objective of inventory management is to determine and maintain optimum level of investment in inventories to achieve the objective of inventors.

To have stocks available as and when they are required. To meet high demand without keeping excess stock. To utilize available storage space. To maintain adequate inventory. To ensure proper safety of materials of production. To facilitate purchasing economics. To provide check against loss of materials. To contribute to profitability. To bring down various costs associated with inventory to low. To keep investments in stock at reasonable level, so that is no loss of interest on

capital.

Both excessive and inadequate inventories are not desirable. These are the two danger points within which affirm should operate. The firm should always avoid situation of over investment and under investment.

The major dangers of Over Investment are:

Unnecessary tie-up of the firm’s fund and loss of profits. Excessive carrying cost and Risk of liquidity

Maintaining and inadequate level of inventory is also dangerous. The consequences of under investment are

Production hold ups and Failure to meet delivery commitments

The aim of inventory management of any firm, thus, should be to avoid excessive and inadequate level of inventory and maintain sufficient inventory for smooth production and sales operation.

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FACTORS AFFECTING INVENTORY CONTROL POLICY

The inventory policy of an organization has an impact on the whole system there are number of factors which can effect the inventory decisions. These can be broadly divided in the following categories:

A. Characteristics of the manufacturing system:

The nature of the production process. The product design. Production planning and plant layout have significant affect on inventory policy. Some of these factors are:

1 Degree of specialization and differentiation of the product at various stages:The degree of changes in the nature of the product for raw material to final product at various stages of transformation viz final assembly. Assembly and packaging determines the nature of inventory control operation e.g. if nature of product remains more of less same at various stages of production then economies can be achieved by keeping the right balance of stocks of semi finished product.

2 Process capability and flexibility process capability is characterized by processing time of various operation e.g. the replenishment lead-time (length of delay in execution after issuance of replenishment order) directly influence the size of inventory.

Similarly how rapidly and economically a system can adjust its production rate shift production rate shift production facilities from one operations to another operation and change equipment from one product to another determines the margined of flexibility capability inventory levels and customer service needs.

3. Production capacity facilities considerably affects the inventory policy of an organization e.g., capacity for heating oil production in an oil refinery is governed in part by its through-put capacity and in part by its distribution system. Similarly if for any product the cost of storage facility is high then it sets a limit on the storage capacity.

4 Quality requirements shelf life and obsolescence risk.The nature of the production system: It is characterized by the number of manufacturing stages and the interrelationship between various production operations e.g. in product –line system inventory control is simpler than in job-type system.

B Amount of production against shortages:

The is always variation in demand and supply of the product. The protection against such unpredictable variations can be done by means of buffer stocks. The factors responsible for such variations are:

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1. Changes in size and frequency of orders: The amount of product sold in a large

number of order of small size can be operated with less inventory.

2. Unpredictability of sales: If there are too much fluctuations in demand of a product then these can be handled only by flexible and large capacity of inventory operations.

3. Physical and economic structure of distribution pattern: longer the channel of distribution the more is the inventory requirement.field inventories basically improve service to retailers by removing some of the burden of keeping stocks.

4. costs associated with failure to meet demand: When there is heavy penalty on any delay in fulfillment of any order then inventory should be large.

5. The accuracy: Frequency and detail of demand forecasts : fluctuation stock exists when forecast error for inventory needs should be clearly recognized.

6. Protection against breakdown of or other interruption in production.

C Organizational factors: There are certain factors. Which are related to the polices, traditions and environment of any enterprise. Some of these are:

1) Labor relation polices of the organization.2) Amount of capital available for stock.3) Rate of return on capital a available if invested elsewhere.

D Other Factors: These are related to the overall business environment of the region viz.

1) Inflation 2) Strike situation in communication facilities.3) Wars or some other natural calamities like famines, floods etc.4) Differences between input and output.

FUNCTIONS OF INVENTORY MANAGEMENT

Assessing and stabilizing demand forecast for different kinds of material. Obtaining and recording correct specification, for different items, from the production

department. Maintaining complete details of all stock items. Reviewing of all stock items as per a set timetable. Identifying low stock and nil stock item and record them.

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RISKS ASSOCIATED WITH INVENTORIES

Price decline due to increase in supply and price-cutting through competition. Production deterioration due to storing too long period are improper storing. Obsolescence due to change in customer taste, new production techniques,

improvement in product design, specifications etc.,

PROBLEMS OF INVENTORY MANAGEMENT

Maintaining a sufficiently large size of efficient and smooth production and sales. Maintaining minimum investment in inventories to minimize cost and minimize

profitability.

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CHAPTER-VINVENTORYMANAGEMENT TECHNIQUES

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INVENTORY MANAGEMENT TECHNIQUES

In managing inventories, the firm’s objectives should be at par with the share holders, wealth maximization principle. To achieve this the firm should determine the optimum level of inventory.

1. Level setting

2. Economic order quantity

3. Just-in- time inventory system

4. ABC analysis

5. VED Analysis

6. Perpetual inventory system

7. inventory turnover ratio

8. inventory cost reports

1) LEVEL SETTING :

This consists of level that will enable us to have a proper control on materials. Following are the level sets:

Re-order level: This level is fixed some where between the maximum and minimum level in such a way that the difference of quantity of the material between the re-ordering level and the minimum level will be sufficient to meet the requirements of production up to the time the fresh supply of the material is received.

Maximum level: This represents the maximum quantity of an item of material, which can be held in stock at any time. The quantity is fixed so that the may be no over stocking.

Maximum stock level = re-ordering level + re-ordering quantity – (Minimum consumption *minimum re-ordering period)

Minimum stock level:

This represent the minimum quantity of material, which must be maintained in hand at all times.

Minimum stock level = re-ordering level – (Normal consumption* normal re-order period)

Danger level:This means a level at which normal issues of the material are stopped and issues are

made only under specific instructions.

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Danger level = average consumption* max. Re-order period for emergency purchases.

ECONOMIC ORDER QUANTITY (EOQ):

One of the major inventory management problems to be resolved is how much inventory should be added when inventory is replenished. If the firm is buying raw materials, it has to decide lots in which is to be purchased on each replenishment. These problems are called order quantity problems, and the task of the firm is to determine the optimum are economic order quantity or economic lot size.

EOQ = 2AO/C

Where A = annual requirements

C = carrying cost per unit

O = ordering cost per unit

ORDERING COSTS: relating to purchase items includes expenses on requisition, expediting, transport, receiving and placing in storage.

CARRYING COSTS: include expenses on interest on capital locked up in inventory, storage, insurance, obsolescence and taxes. Carrying costs generally are about 25% of the value of the inventories.

ASSUMPTIONS OF EOQ MODEL

1. The forecast usage / demand for a given period : usually one year, is known .2. the usage / demand is even through out the period.3. Inventory orders can be replenished immediately (there is no delay in placing and

receiving orders). 4. there are to distinguishable costs associated with inventories : cost of ordering and cost of

carrying.5. the cost per order is constant regardless of the size of order.6. the cost of carrying is a fixed percentage of the average value of inventory.

The prime objective of inventory management is to find out and maintain optimum

level of investment in inventory to minimize the total costs associated with it. The

EOQ is the optimum size of the order for a particular item of inventory calculated at a

point where the total inventory costs are at a minimum for a particular stock item .It is

an optimum size of either a normal

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Out side purchase order or an internal production order that minimizes total annual

holding and ordering costs of inventory. Stock-out costs are difficult to incorporate

into this model.

.

The ordering costs are the costs of placing a separate order multiplied by the number

of separate orders placed in the period. The carrying costs can be calculated based on

the assumption that annual cost of carrying a particular stock item on average, half

the stock is on hand all the time in addition to the safety or buffer stock. The fewer

the orders, the lower costs of ordering, but the greater the size of the order the greater

the costs of carrying. The safety or buffer stock has no bearing on the EOQ, only on

the timing of orders. The EOQ is an optimum quantity of materials to be ordered after

consideration. Of the following three categories of costs:

Ordering Costs: The costs of ordering inventory include the following:

• Preparation of purchase order.

• Costs of receiving goods.

• Documentation processing costs.

• Transport costs.

• Intermittent costs of chasing orders, rejecting faulty goods.

• Additional costs of frequent or small quantity orders.

• Where goods are manufactured internally, the set-up and tooling costs Associated

with each production run.

Carrying Costs: The carrying costs of inventory include the following:

• Storage costs (rent, lighting, heating, refrigeration, air-conditioning etc.)

• Stores staffing, equipment maintenance and running costs.

• Handling costs.

• Audit, stocktaking or perpetual inventory costs.

• Required rate of return on investment in current assets.

• Obsolescence and security costs.

• Costs of money tied up in inventory.

• Pilferage and damage costs.

Stock-out Costs: The stock-out costs are associated with running out of stock, which

include the following:

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• Lost contribution through the lost sales caused by the stock-out.

• Loss of furniture sales because customers go elsewhere.

• Loss of customer goodwill.

• Cost of production stoppages caused by stock -outs of WIP or raw material.

• Labor frustration.

• Over stoppages.

• Extra costs associated with urgent replenishment purchases of small quantities.

Calculate Re-order Quantity; Re-order level, Minimum level, Maximum level,

Average stock level

ZUARI Nife power system ltd. Manufactures D (-) Mandalicacid material and the

following particulars are collected for the year ended March 2007:

• Monthly demand 3000

• Cost of placing an order 300

• Annual carrying cost 15

• Normal usage 230

• Minimum usage 120

• Maximum usage 420

• Re-order period 4 to 6 weeks

Solution:

REORDER QUANTITY

Where, U= Annual consumption (units) during the year

p= Cost of placing an order

S= Annual carrying cost per unit

31

=1164 Kgs

RE-ORDER LEVEL= Maximum usage x Maximum delivery period

= 420 x 8 = 3360 Kgs

MINIMUM LEVEL= Re-Order level - (Normal usage x Normal

Delivery period)

= 3360 - (230 x 7)

= 1750 Kgs

MAXIMUM LEVEL= (Re-Order level + Re-Order quantity)-

(Minimum usage x Minimum delivery period)

= (3360 + 1164) - (120 x 6)

= 3804 Kgs

AVERAGE = (Minimum level + Maximum level)/2

= (1750 +3804)/2

Calculate Re-order Quantity; Re-order level, Minimum level, Maximum level,

Average stock level

ZUARI Nife power system ltd. manufactures material Di isopropyl ether and

the following particulars are collected for the year ended March, 2007:

Monthly demand 6000

Cost of placing an order 600

Annual carrying cost 15

Normal usage 450

Minimum usage 350

Maximum usage 700

Re-order period 6 to 8 weeks

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Solution:

REORDER QUANTITJY:


P= Cost of placing an order

S= Annual carrying cost per unit

=2640Kgs

RE-ORDER LEVEL = Maximum usage x Maximum delivery period

= 700 x 8 = 5600 Kgs

MINIMUM LEVEL = Re-Order level - (Normal usage x Normal

delivery period)

= 5600 - (450 x 7)

= 2450 Kgs

MAXIMUM LEVEL = (Re-Order level + Re- Order quantity) –

(Minimum usage and Minimum delivery period)

= (5600 + 2640) - (350 x 6)

= 6140 Kgs

= 15500 Kgs

AVERAGE LEVEL= Minimum level +Maximum level/2

= 2450 + 15500/2

= 10200 Kgs

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Calculate Re-order Quantity, Re-order level, Minimum level, Maximum level,

and Average stock level

ZUARI Nife power system ltd Manufactures Hexa methyl dislazine

material and the following particulars are collected for the year ended March, 2007:

• Monthly demand 3000

• Cost of placing an order 300

• Normal usage 230

• Minimum usage 120

• Maximum usage 420

• Re-order period 6 to 8 weeks

Solution:

REORDER QUANTITY


p= Cost of placing an order

s= Annual carrying cost per unit

34

=549 Kgs

RE-ORDER LEVEL= Maximum usage x Maximum delivery period

= 420 x 8

= 3360 Kgs

MINIMUM LEVEL Re-Order level - (Normal usage x Normal

deliveryperiod)

= 3360 - (230 x 7)

= 1750 Kgs

MAXIMUM LEVEL (Ordering level + Ordering quantity) - (Minimum usage

x Minimum delivery period)

= (3360 + 6000) - (120 x 6)

= 8640 Kgs

AVERAGE LEVEL = (Minimum level + Maximum level)/2

= (1750+ 8640)/2

= 5195 Kgs

7. JUST-IN-TIME MANAGEMENT

Japanese firms popularized the Just-in Time (JIT) system in the world.

In a lIT system material or the manufacturing components and parts arrive to the

Manufacturing sites or stores just few hours before they are put to use. The delivery

of material is synchronized with the manufacturing cycle and speed. IIT system

eliminates the necessity of carrying large inventories, and thus, saves carrying and

other related costs to the manufacturer.

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The system requires perfect understanding and coordination between the

Manufacturer and suppliers in terms of the timing of delivery and quality of the

Material. Poor quality material or components could halt the production. The lIT

Inventory system complements the Total Quality Management. The success of the

System depends on how well a company manages its suppliers. They will have to

Develop adequate systems and procedures to satisfactory meet the needs of

Manufacturers.

Who can use JIT?

Quality process improvement is usually thought of as a continuous Journey of

improvement, with no definite ending, since there is always more potential. From the

point of view of material flow the principle of JIT is obviously ideal but it is often

difficult to implement in practical situations unless the conditions are right. Of course,

the right conditions do not happen by accident and anyone looking for the benefits

has to work hard to create the appropriate situation. lust-in-time supply should be

considered as a quality process, although most of the objections to lIT are based on

lack of quality in some aspect of supply or demand. If stock levels are incorrect, this

is often the result of complacency or lack of understanding. There is no perfect

solution to stockholding but, like any other quality improvement process, lIT

operations gradually develop an existing unsatisfactory situation into an improved

one. A decrease in lead times and simplification of processes should be the aim of all

inventory managers.

From the viewpoint of JIT, time is a value-added commodity and wasting it is

unprofitable. The more time saved the better, and continuous improvement means

reducing the timescales. The definition of just in time presented so far can apply to

any material management process, which actively minimizes timescales. The purist

would think that there is more to JIT than this simple concept and there are some

specific concepts for achieving this reduction in timescales, particularly:

• Desire to improve

• Simplification

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• Demand-led supply (pull)

• Quality conformance

• Devolution of responsibility.

If these concepts are put into practice, then an operation has a JIT

Philosophy supported by improvements in communications and driven by the need

for better service and lower costs, the influence of JIT has been felt in all types of

business and has fuelled change

4 VED ANALYSIS:

VED means vital, essential and desirable analysis is used primarily for control of

spare parts. Te spare parts can be divided into three categories – vital, essential ands

desirable – keeping in view the critically to production. The spare, the stock-out of which

even for a short time will stop production for quit some time and where the cost of stock-out

is very high are known as vital spares. The spares, the absence of which can’t be tolerated for

more than a few hours or a day and the cost of lost production is high and which are essential

for the production to continue, are known as essential spares. The desirable spares are those

spares, which are needed, but their absence for even a week or so will not lead to stoppage of

production.

5. PERPETUAL INVENTORY SYSTEM:

The perpetual inventory system is a system of records maintained by the controlling department, which reflects the physical movements of stock and their current balance. Bin cards and the stores ledger help the management in maintaining the system as they make a record of the physical movement of stock on the receipts and issue of the materials and also reflect the balance in the stores. Thus, it is system of as certaining balance after every receipt and issued of materials through stock records to facilitate regular checking and to avoid closing down the firm for stocking.

6 Inventory Turn Over Ratio: -

Inventory tum ratio helps management to avoid capital being locked up unnecessarily.

The ratio reveals the efficiency of stock keeping.

Inventory turnover ratio is given by the formula:

Cost of material consumed

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Cost of average stock held during the period

Cost of average stock

Cost of opening stock + Cost of closing stock

2

The Inventory turnover ratio can be calculated (in days) as follows:

Days during the period

Inventory turnover ratio

This will reveal the number of days for which the stocks are held.

Example for Inventory turnover ratio for the year ended 2004-05

Material: 7up (2-METHYL PIPERZINE)

• Material consumed during the year = 3317

• Cost of Material per Kg = 585

• Cost Material consumed = 3317 x 585 =185445

• Opening Stock = 918

• Cost of Opening Stock = 918 x 585 = 537030

• Closing Stock =63

• Cost of Closing Stock = 63 x 585 = 36855

Inventory turnover ratio:


Cost of average stock held during the period38

185445

286943

= 0.6

Cost of average stock

Cost of Opening Stock + Cost of Closing

2

537030 +36855

2

= 286943

Inventory turnover ratio calculated in days:



= 365 days

0.6

608 days


Material: B – Soda


• Cost of Material per Kg =30

• Cost Material consumed = 301770x 30 = 9053100

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• Opening Stock Stock = 12300 x 30 = 369000

• Closing Stock = 5700





= 9053100

270000

33.53

Cost of average stock:

Cost of Opening Stock + Cost of Closing Stock

2

369000 + 171000

2

270000




365 x 100

33.53

1088 days


Material: (Kasturi) VANADYL ACETYL ACETONA


• Cost of Material per Kg =29

• Cost Material consumed = 87 x 29 = 2523


• Cost of Opening Stock =118x29=3422

40

• Closing Stock =63



= Cost of material consumed


2523

26245

0.09

Cost of average stock :


2

3422 + 1827

2

26245




365

0.09

4055 days


Material: (Manasa) D (-) MANDALIC ACID



• Total Cost of Material consumed = 1215 x 775 = 941625


41







941625

345650

2.7

Cost of average stock:


2

15500 + 675800

2

345650




= 365

2.7

135 days

Example for Inventory turnover ratio for the year ended2010-12

Material: (Maaza) L-PROLINE

• Material consumed during the year =3050


• Total Cost of Material consumed = 3050 x 451 = 1375550





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Cost of average stock held during the

period

= 1375550

129888

10.5

35 days

PRICING OF RAW MATERIALS

Some of the important methods used for pricing inventories used in production are:

FIFO Method / First In First out Method: This method assumes that the order in which materials are received in the stores is the order in which they are issued from the stores. The material that is issued first is priced on the basis of the cost of materials received earliest.

LIFO Method / Last In First Out Method: This method is apposite of the FIFO method. It assumes that materials that is purchased last is issued first. The materials issues are priced on the basis of the cost of most recent parches.

Weight Average Cost method: In this method, materials issues are priced at the weighted average cost of materials in the stock. The weighted average price takes into account the rice and quantity of the materials in store. It is better to issue the materials at weighted average price method because it recovers the cost price of the materials from production.

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CHAPTER-VI

RESERCH & DEVELOPMENT

44

MONTORING AND CONTROLLING OF INVETORIES

ABC ANALYSIS OF STORES CONTROL

ABC analysis is popularly known as always Better Control or alphabetical approach. This is based on the control of selective inventory managements. It is modern method of stores control, which aims at concentrating efforts in those materials where the results will be the greatest.

All items of stores are not of equal relative importance. It implies that effort, time and money spent on the different items of stores should be in proportion to their relative importance to exercise effective stores control. Most of the large organization find it useful to divide various items of stores into three categories for exercising effective material control.

This approach calls for classifying inventories into three broad categories, A,B and C.

Category ‘A’ represents a smaller percentage of items of materials in the stores i.e. 10% which contribute to a larger percentage of the value of consumption i.e. 70%

Category ‘B’ falls between the two extremes of category of category ‘A’ and category ‘C’. the items, which fall under this category, are those whose percentage number is more or less equal to the value of consumption i.e. 20%.

Category ‘C’ represents a large percentage of items of materials under the store i.e. 70% will account to a smaller percentage of the value of consumption i.e. 10%

CATEGORY ITEM% VALUE%

A 10% 70%

B 20% 20%

C 70% 10%

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ADVANTAGE OF ABC ANALYSIS

1. A strict control is ensured on the items that represent a high percentage on the materials costs and thereby carrying cost and ordering costs are kept at the minimum level.

2. Equal attention to ‘A’ , ‘B’ and ‘C’ items are mot desirable and are expensive. ABC analysis should be followed to give due attention to the items which they deserve keeping in view the value of consumption.

3. ABC is helpful to rationalize the number of order to be placed for the purchase of materials and reduce the overall value of inventory of materials.

4. storage cost is reduced as reasonable quantity of materials which account for high percentage of value of consumption will be maintained in the stores.

5. ABC analysis helps in the maintenance of high inventory turnover ratio.

PROCEDURE

1. Rank the items of inventory in a descending order on the basis of their annual consumption value and number them 1 to n.

2. Record the running cumulative totals of annual consumption values and express them as percentage of the total value of consumption.

3. Express each number in the list, 1 to n (the percentage are actually cumulative percentage)

4. The cumulative percentage of consumption value against the cumulative percentages of number are looked upon and classified into three broad categories A,B, &C.

ORDERPOINT:

The standard EOQ assumes that materials can be produced and hence implies that the firm should place an order for replenishment when the inventory level drops to zero. However, in the business world, procurement of materials takes time and the order level must be such that the inventory at the time of ordering suffices to meet the needs of producing during the procurement period.

SAFETY STOCK

It is not always easy to predict usage and lead –time accurately. The demand for materials may fluctuate from the normal lead-time. if the actual usage increases or the delivery of inventory is delayed, the firm can face a problem of stock-out, which can prove to be costly for the firm. Therefore in order to guard against stock-out, the firm may maintain a safety stock-some minimum or buffer inventory as cushion against expected increased usage or delay in delivery time.

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SUCCESSFUL INVENTORY MANAGEMENT

Successful inventory management involves balancing the costs of inventory with the benefits of inventory. Many small business owners fail to appreciate fully the true costs of carrying inventory, which include not only direct costs of storage, insurance and taxes, but also the cost of money tied up in inventory. This fine line between keeping too much inventory and not enough is not the manager’s only concern others include:

Maintaining a wide assortment of stock – but not spreading the rapidly moving ones too thin.Increasing inventory turnover – but not sacrificing the service level.Keeping stock low – but not sacrificing service or performance.Obtaining lower process by making volume purchases – but not ending up with slow –moving inventory; and having an adequate inventory on hand – but not getting caught with obsolete items.

The degree of success in addressing these concern is easier to gauge for some than for others. For example, computing the inventory turnover ration is a simple measure of managerial performance. This value give a rough guideline by which managers can set goals and evaluater performance, but it must be realized that the turnover rate varies with the function of inventory, the type of business and how the ratio is calculated (whether on sales or cost of goods sold). Average inventory turnover ratios for individual industries can be obtained from trade associations.

CONTROLING YOUR INVENTORY

To maintain an in – stock position of wanted items and to dispose of unwanted items, it is necessary to establish adequate controls over inventory on order an inventory in stock. There are several proven methods for inventory control. They are listed below, from simplest to most complex.

Visual control enables the manager to examine the inventory visually to determine if additional inventory is required. In very small business where this method is used, records may not be needed at all or only for slow moving or expensive items.

Tickler control enables the manager to physically count a small portion of the inventory each day so that each segment of the inventory is counted every so many days on a regular basis.

Click sheet control enables the manager to record the item as it is used on a sheet of paper. Such information in then used for recorder purpose.

Stub control (used by retailer) enables the manager to retain a portion of the price ticket when the item is sold. The manager can then use the stub to record the item that was sold.

As a business grows, it may find a need for a more sophisticated and technical from of inventory control. Today the use of computer systems to control inventory is far more feasible for small business than ever before, both through the widespread

47

existence of computer service organizations and the decreasing cost of small-sized computer. Often the justification for such a compute based system is enhanced by the fact that company accounting and billing procedures can also be handled on the computer.

Point-of-sale terminals really information on each item used or sold. The manager receives information printouts a regular intervals for review and action.

Off-line point –of sale terminals relay information directly to the supplier’s computer who uses the information to ship additional items automatically to the buyer /inventory manager. The final method for inventory control is done by an outside agency. A manufacture’s representative visits the larger retailer on a scheduled basis, takes the stock count and writes the recorder. Unwanted merchandise is removed from stock and returned to the manufacturer through a predetermined, authorized procedure.

DEVELOPMENTS IN INVENTORY MANAGEMENT

In recent years, two approaches have had a major on inventory management:Material Requirements planning (MRP) and just-in-time (JIT and kaban) their application is primarily within manufacturing but suppliers might fine new requirements placed on them and sometimes buyers of manufactures items experience different in delivery.

A material requirement planning is basically an information system in which sales are converted directly into loads on the facility by sub-unit and time period. Materials are scheduled more closely; thereby reducing inventories, and delivery times become shorter and more predictable. Its primary use is with products composed of many components.

MRP system are practical fore smaller firms the computer system is only part of the total project, which is usually long-term taking one to taking one to develop. Just –in-time inventory management is an approach, which works to eliminate inventories rather than optimize them. The inventory of raw materials and work-in process falls to that needed in a single day. This is accomplished by reducing set-up times and lead times so that lots may be ordered. Suppliers may have to make several deliveries a day or move close to the user plants to support this plan.

TIPS FOR BETTER INVENTORY MANAGEMENT

At time of delivery

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Verify count-make sure you are receiving as many cartons as are listed on the delivery receipt.

Carefully examine each carton for visible damage-if damage is visible note it on the delivery receipt and have the deriver sign your copy.

After delivery, immediately open all cartons and inspect for merchandise damage.

When damage is discovered: Retain damaged items-all damaged materials must be held at the point

received. Call carrier to report damage and request and inspection Confirm call in writing – this is not mandatory but it is one way to project

your self.Carrier inspection of damaged items.

Have all damaged items on the receiving area – make certain the damaged items have not moved form the receiving area prior to inspection by carrier.

Keeping damaged materials – damaged materials should not be used or disposed of without permission by the carrier.

SPECIAL TIPS FOR MANUFACTURERS:

If you are in the business specifications play a very important role.In writing specification, the following elements should be considered.

Do not request feature or quality that are not necessary for the item’s intended use.

Include full descriptions of any testing to be performed. Describe the quality of the items in clear terms

The following actions can help save money when you are stocking inventory.

Substitution of less costly materials without impairing required quality. Improvement in quality or charge in specifications that would lead to saving

in process time or other operating savings. Developing new source of supply Greater use of bulk shipments. Quantity savings due to large volume, through consideration of economic

order quantity. A reducing in unit prices due to negotiations. Initiating make – or- buy studies. Application of new purchasing techniques Using competition along price service and delivery when making the purchase

selection decision.

ABOUT THE PROJECT

OBJECTIVES RELATING TO DO PROJECT IN ZUARI49

ZUARI is the one of the most leading organization in India. Networks of the organizations are not only linked within the India but with foreign

countries like USA, UK.

METHODOLOGY

First a systematic study of the various types of inventories is done for a certain period.

Secondary data is collected for this study through published accounts of the praga tools i.e. financial accounts and cost accounts as well as various stores ledgers and inventory reports maintained.

CHAPTER-VII

DATA ANALYSIS AND INTERITATION

50

INVENTORY CONTROL AND ITS IMPACT ON COSTS:Value wise inventory and consumption analysis are brought out on quarterly basis

indicating RM, SS, CT, PM are value at cost. A class items which are 70%, B class items which are valuing 20%, and C class items which are valuing 10% of the total inventory are brought out for verification on internal audit. The stores verify C class items and to that extent a certificate 4 is issued at the year-end regarding the correctness. Physical balance are verified a with kardex and the difference are intimated to stores FAW of the group by the internal Audit. FAW of the group verifies and gives the rectification in entries i.e., shortage items values are charged off to physical inventory variation and the excess quantities are adjusted in the inventory ledger after obtaining the component authority’s approval.

This system enables control on the inventories and at the same time costs on some are checked.Materials issued to subcontractors are booked to consumption as and when issued through MIRS. A record is being maintained at subcontracts section, party wise, job wise and description of materials and quantities issued.

1 inventory, materials, sales & production at a glance:-

Particulars 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11Raw Materials 5307 4735 5630 5267 1645 1616 1800Work in progress 6193 8350 3877 4260 3372 3711 4290Finished goods 1059 1446 651 1183 946 649 780Total 12559 14531 10158 10710 6622 6064 6998SundryDebtors

19865 16681 31344 42946 58073 79469 _

Materials consumed

26248 32701 49307 47247 72229 38917

Net sales 47002 57115 89218 84177 72230 6518851

Gross sales 56875 67412 100056 93455 77067 70029

Cost Production

56671 70315 89218 86935 72781 68046

Production 1209 1934 8058 13055 5071 5204Total 55462 62381 81160 73880 67710 62842

Particulars 2004-052005-06 2006-072007-082008-092009-102010-12

Raw 5307 4735 5630 5267 1645 1616 1800Material

Work 6193 8350 3877 4260 3372 3799 4290Progress

Finished 1059 1446 651 1183 946 649 780 Goods

Total 12559 14531 10158 10710 6622 6064 6998

Sundry 19865 16681 31344 42946 58073 79469Debtors

Materials 26248 32701 49307 47247 72229 38917Consumed

Net sales 47002 57115 89218 84177 72230 65188

Gross sales 56875 67412 100056 93455 77067 70029Cost of Production 56671 70315 89218 86935 72781 68046

Production: 1209 1934 8058 13055 5071 5204(-) profit

Total 55,462 62,381 81,160 73,880 67,710 62,842

2 Raw material inventory

52

Particulars2003-20042005-062005-20062006-20072007-20082008-092010-12

Raw 5307 4735 5630 5267 2304 1616 1800MaterialMaterials 26248/12 32701/12 49307/12 47247/12 72229/12 38917/12 46247/12 Consumed(per month)

Monthly: 2187 2725 4108 3937 3937 3243 3100Consum-ption(2)

No.of mon 2.43 1.74 1.37 1.34 0.66 0.50 0.49Ths Raw MaterialStock availablew.r.t. Monthlyconsumption(3)=R.m/Monthly consum-ption (1/2)

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3. Work in progress Inventory:-

Particulars 2004-052005-06 2006-072007-082008-092009-102010-12

Work in 6193 8350 3877 4260 3372 3799 3600progress

Cost of Produ 55462/12 62381/12 81160/12 73880/12 67710/12 62842/12 61790/12 ction (per Month)

Monthly: 4647 5198 6763 6157 5643 5237 4996Consum-PtionNo. of monthsWork in progress held in inventory =W.I.P/monthlyConsumption

For giving no. of months gross working capital and each components including raw material, work in progress, finished goods are co-related as follows:-

a. Raw material stocks are co-related to material consumption.b. WIP is co-related to cost of production.

Finished goods are correlated to net sales.

INTREPRETATION ON ABC:-

The corporation held a maximum stock of raw material, in the year 2001-02 and

improved year by year and reached 0.55 months at the end of 2005-2006.

WORK IN PROGRESS:- The corporation held a peak WIP during the year 2001-

02 and was around 073 months on an average every year during the next 3 years.

FINISHED GOODS:- The average finished goods stock held during the period of

study is 0.20 months with peak – finished goods stock of 0.30 months and lowest to

the tune of 0.16 per month.

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The ITR (inventory turnover ratio) has increased from 4.09 to 6.70 from the year

2005-06 to 2003-04 which shows that the inventory is efficiently managed.

The ITR (inventory turnover ratio) has increased from 6.70 in the year 2003-04

to7.57 in the year 2006-2007which indicates that the inventory is managed in a good

manner.

In the similar way the ITR has increased from 7.57 in the year 2006-2007to 8.09 in

the year 2005-06 which indicates that the inventory has been managed efficiently in

the year2010-12 has increased from 8.9211.

COMPONENTS OF INVENTORY:

The components of inventory are:-a) Raw material andb) Work in progress.

a) Raw material inventory turnover:Raw material inventory turnover = Material consumed

-------------------------- Average raw material inventory

55

Particulars 2004-052005-06 2006-072007-082008-092009-102010-12

Materials 2624.22 32701.28 49307.20 47246.65 41979.11 38916.93 38735.5Consumed

Raw Materials InventoryOpening stock 4578.19 2474.42 3224.95 4545.99 4277.66 1648.53 1616.21

Closing stock 2474.42 3224.95 4545.99 277.66 1648.53 1616.21 1552.31

Average raw 3526 2850 3885.5 4412 2963 1633 1520 Material Inventory

Raw material 0.744 11.48 12.69 10.71 14.17 23.84 21.62inventory TurnoverRaw material inventory turnover

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INTERPRETATION:-

The raw material inventory turnover ration has increased from 0.744 to 11.48 from the year 2001-02 to 2005-06 which shows the efficient management of raw material inventory.

The RMITR (Raw material inventory turnover ratio) has increased from 11.48 to 12.69 from the year 2005-06 to 2003-04. which shows that the raw material inventory is efficiently managed.

The RMITR (Raw material inventory turnover ratio) has increased from 12.69 in the year 2003-04 to10.71 to the year 2006-2007which indicated that the raw material inventory is not managed properly.

The RMITR has increased from 10.71 in the year 2006-2007to 14.17 in the year 2005-06 which indicates that the raw material inventory has been managed in compensate the previous decline in the RMITR.

The RMITR has increased from 14.17 in the year 2005-06 to 23.84 in the year 2008-09 which indicates that the raw material inventory has been managed in compensate the previous decline in the RMITR.

The RMITR has been decreased from 23.84 to 21.62 in year2010-12

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b) Work-in progress inventory turnover:-

Work in progress inventory turnover = Cost of production ----------------------- Average work in progress inventory

Particulars 2004-052005-06 2006-072007-082008-092009-102010-12

Cost of 55462 62381 81160 73880 67710 62842 62560Production

WIPOpening stock 5694 6193 8350 3876 4260 3372 3799

Closing stock 6193 8350 3876 4260 3372 3799 3241

Average WIP 5943.5 72715 6113 4068 3816 3585.5 3520Inventory

WIP inventoryTurnover 9.3315 0.8579 13.2766 18.1613 17.7437 17.5267 17.325

WIP inventory turnover = COP/avg. WIP inventory

INTERPRETATION:

The work in progress inventory turnover ratio decreased from 9.3315 to 0.8579 from the year

2001-02 to 2005-06 which shows that the work in progress inventory is not managed

efficiently.

The WIPITR (work in progress inventory turnover ratio) has increased from 0.8579

to 13.2766 from the year 2005-06 to 2003-04. which shows that the work in progress

inventory is efficiently managed in order to compensate for the previous declined.

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The WIPITR (work in progress inventory turnover ratio) has increased from 13.2766

to18.1613 from the year 2003-04 to 2006-2007which shows that the work in progress

inventory in a good manner.

The WIPITR has decreased from 18.1613 to 17.7437 from the year 2006-

2007to2007-2008which shows that the work in progress inventory is not managed

efficiently.

The WIPITR has slightly decreased from 17.7437 to 17.5267 from the year 2005-06

to 2008-09 which shows that the work in progress inventory has not managed to the

required level.

The WIPITR has decreased from 17.374 to 17.325 from the year 2008-09 to2010-12

which shows that the work in progress inventory has not managed to the required

level.

Efficiencies in the above turn over ratios for inventories pointed our above are

confirmed by our earlier analysis in ascertaining periods of holding (in months) of the

same inventories.

There was a reduced carrying cost of inventory coupled with increased flow of funds.

A decreasing view is observed in the period of holding under above analysis of the

inventories. This is indicative of better inventory management leading to cost

reduction (inventory carrying cost ) and release of liquidity (funds)

For valuation of inventory weighted average method is followed in ZUARI.

Valuation of inventory has a bearing for the purpose of control and the same should

confirm to the flow of production process and pattern of material issues.

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RATIO ANALYSIS:

INVENTORY TURNOVER RATIO:

Inventory turnover = cost of goods sold /average inventory.

Cost of goods sold = sales – gross profit

Average inventory = opening stock in inventory + closing stock inventory--------------------------------------------------------------

2

Particulars 2004-052005-06 2006-072007-082008-092009-102010-12

Sales 56847.67 67411.65 100055.98 93455.40 77066.76 70029.03 69902.5

Gross profit 4564.18 9937.16 17372.76 14489.74 6927.01 622.80 602.5

Cost of goods sold (sales 52310.49 57474.49 82683.22 78965.66 70139.75 63806.23 60525.2 Gross profit)

inventory:openingstock 13055.73 12559.82 14531.93 10158.94 10710.86 6622.64 7681.96Closingstock 12559.82 13545.88 10158.94 10710.86 6622.64 7681.96 7250.12

Average 12797.78 13545.88 12345.44 10434.9 8666.75 7152.3 7466.04Inventory

Inventory 4.09 4.25 6.70 7.57 8.09 8.9211 8.1067Turnover Ratio

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INVENTORY TEURNOVER RATIO

INTERPRETATION:-

The inventory turnover ratio has increased from 4.09 to 8.92 from the year 2001-02 to2010-12 which shows the efficient management of inventory.

INDENTOR(project leader)

Purchase

Lowest 1 & Technical visibilityReport by indenter

Placing Purchases

Material receipt

Stores Receipt

Inspection & Raising CSR

Take –in-stock

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CHAPTER-VIIICONCLUSTIONS AND SUGGESTIONS

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CONCLUSTIONS

1. Inventory procurement is also based on and does not confirm to economic batch quantities leading to surplus inventories and non-moving inventories.

2. There is a regular physical verification for A and B class items by internal audit department to highlight on non-moving inventories.

3. It is also observed that are frequent changes in specifications by the customer rending the already procured inventory, either obsolete or no-moving.

4. As ZUARI is a multiproduct organization catering to different customer on divergent technologies the inventory procurement for various ranges of products is quite high.

5. In spite of the above constraints there is reasonably a good control noticed a reflected in the period of holding of inventories and turnover ratio.

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SUGGESTIONS

1. As a preventive measure there should be a regular monitoring mechanism at the stage

of procurement it self whether there is a control exercised in purchasing material in

line with estimated, standard bill of material.

2. A regular reporting system on inventory should be in place to highlight on carrying

costs and liquidity covering all the business groups and at the corporate level.

3. Once non-moving inventory is observed and declared a quick disposal action has to

be initiated. This exercise has to be carried on through out the year.

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CHAPTER-X

BIBLIOGRAPHY

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BIBLIOGRAPHY

Financial management M.Y. Khan, P.K. Jain

Financial management Prasanna Chandra

Financial management I.M. Panday

Company Prospectors

Websites

www.Nifepowersystem.com

www.google.com

www.ZUARI.com

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