CHAPTER-I

1.0 INTRODUCTION

Inventory control is vitally important to almost every type of business, whether

product or service oriented. Inventory control touches almost every facets if operations. A
proper balance must be struck to maintain proper inventory with the minimum financial
impact on the customer. Inventory control is the activities that maintain stock keeping
items at desired levels. In manufacturing since the focus is on physical product, inventory
control focus on material control.

“Inventory” means physical stock of goods, which is kept in hands for smooth and
efficient running of future affairs of an organization at the minimum cost of funds blocked
in inventories. The fundamental reason for carrying inventory is that it is physically
impossible and economically impractical for each stock item to arrive exactly where it is
needed, exactly when it is needed.

Inventory management is the integrated functioning of an organization dealing with

supply of materials and allied activities in order to achieve the maximum co-ordination and
optimum expenditure on materials. Inventory control is the most important function of
inventory management and it forms the nerve center in any inventory management
organization. An Inventory Management System is an essential element in an organization.
It is comprised of a series of processes, which provide an assessment of the organization’s
inventory.

Page 1
1.1 BACKGROUND TO THE STUDY

Inventory management is the supervision of non-capitalized (inventory) and stock

items. A component of supply chain management, inventory management supervises the
flow of goods from manufacturers to Warehouses and from these facilities to point of sale.
A key function of inventory management is to keep described record of each new or
returned product as it enters or leaves a warehouse or point of sale. Inventories make
possible the smooth and efficient operation of manufacturing organizations by decoupling
individual segments of the total operation. Purchased parts inventory permits activities of
the purchasing and supply department personnel to be planned, Controlled and concluded
somewhat independently of shop-product operations. These inventories allow additional
flexibility for supplies in planning, producing and delivering in order for a given product's
part.
Management is very critical about any shortage of inventory items required for production.
Any increase in the redundancy of machinery or operations due to shortage of inventory
may lead to production loss and it’s associated costs.

Page 2
1.2 CONCEPTUAL FRAME WORK

Inventory management is the integrated functioning of an organization dealing with

supply of materials and allied activities in order to achieve the maximum co-ordination and
optimum expenditure on materials. Inventory control is the most important function of
inventory management and it forms the nerve center in any inventory management
organization. An Inventory Management System is an essential element in an organization.
It is comprised of a series of processes, which provide an assessment of the organization’s
inventory.

TYPES OF INVENTORIES
A manufacturing firm generally carries the following types of inventories:
1) Raw Materials.
2) Bought out parts.
3) Work-in-process inventory (WIP).
4) Finished goods inventories.
5) Maintenance, repair and operating stores.
6) Tools inventory.
7) Miscellaneous inventory.
8) Goods in transit.
9) Goods for resale.
10) Scrap Material.
REASONS FOR HOLDING INVENTORY
1. To stabilize production.
2. To take advantage of price discounts.
3. To meet the demand during the replenishment period.
4. To prevent loss of orders.
5. To keep pace with changing market conditions.
MOTIVES OF HOLDING INVENTORIES
 The Transaction Motive which facilitates continuous production and timely
execution of sales orders.

Page 3
  The Precautionary Motive which necessities the holding of inventories for meeting
the unpredictable changes in demand and supplies of materials.
 The Speculative Motive which induces to keep inventories for taking advantage of
price fluctuations, saving in re-ordering costs and quantity discounts etc.,.
COSTS ASSOCIATED WITH INVENTORY
1) Carrying cost
2) Shortage cost
3) Cost of financing
4) Cost of ordering
5) Cost of stock out
6) Production cost
7) Capital cost

Costs involved in inventory:

Every firms maintains inventory depending upon requirement and other features of
firm for holding such inventory some cost will be incurred there are as follows:
Carrying Cost
This is the cost incurred in Keeping or maintaining an inventory of one unit of raw
materials, work-in –process or finished goods. Here there are two basic cost involved.
Cost of storage
It includes cost of storing one unit of raw materials by the firm. This cost may be
for the storage of materials. Like rent of spaces occupied by stock, stock for security, cost
of infrastructure, cost of insurance, and cost of pilferage, warehousing costs, handling cost
etc.
Cost of financing
This cost includes the cost of funds invested in the inventories .It includes the
required rate of return on the investments in inventory in addition to storage cost etc. The
Carrying cost include therefore both real cost and opportunity cost associated with the
funds invested in the inventories.

Page 4
The total carrying cost is entirely variable and rise in directly proportion to the level of
inventories carried.
Total carrying cost = (carrying Cost per unit) x (Average inventory)
Cost of ordering
The cost of ordering includes the cost of acquisitions of inventories. It is the cost of
preparation and execution of an order including cost of paper work and Communicating
with the supplier.
The total ordering cost is inversely proportion to annual inventory of firm. The
ordering cost may have a fixed component, which is not affected by the order size: and a
variable component, which changes with the order size.
Total Ordering Cost = (No. Of orders) x (cost per order
Cost of stock out:
It is also called as Hidden cost. The stock out is the situation when the firm is not
having units of an item in stores but there is a demand for that Item either for the
customers or the production department .The stock out refers to zero level inventory .So
there is a cost of stock out in the sense that the firm face a situation of lost sales or back
orders .The stock outs are quite often expensive. Even the good will of firm also be
effected due to customers dissatisfaction and may lose business in case of finished goods,
where as in raw materials or work in process can cause the production process to stop and
it is expensive because employees will be paid for the time not spend in producing goods.
The carrying cost and the ordering cost are opposite forces and collectively. They
determine the level of inventors in a firm.
Total cost = (cost of items purchased) +(Total Carrying and ordering cost)

Cost of production
The costs related to making or acquiring goods and services that directly generates
revenue for a firm. It comprises of direct costs and indirect costs. Direct costs are those that
are traceable to the creation of a product and include costs for materials and labor whereas
indirect costs refer to those costs that cannot be traced to the product such as overhead.

Page 5
Capital Cost
The one-time costs associated with a project, including the price of purchased
assets such as land, equipment, or other supplies, and the cost of going into debt or issuing
stock in order to fund the project. Calculating alternate capital costs allow a business to
decide which funding models will provide the best net return on investments

Valuation of Inventory:
The methods of valuing inventory are combination of the actual cost and
replacement cost plans. The chief advantage of the cost or net realizable value rule is that it
is conservative. Hence the methods of Valuation of inventory are quite independent of
system of mincing.
In balance sheet closing stock is shown under current assets and is also credited to
manufacturing or trading accounts. The inventories are valued on the basis as follows.
 Cost of raw materials in stock may include freight charges and carrying cost. But
such cost should not exceed market price,
 Work –in –process is generally valued at cost, which includes cost of materials,
labor. And the proportionate factory overhead, as it is reasonable according to
degree of completion,
 Cost of finished goods wound normally to be total or full cost it includes prime cost
plus appropriate amount of the overhead. Selling and distribution cost is deducted
on the other hand work in progress may be valued at work in progress may be
Valued at work cost, marginal cost, prime cost or, even at direct materials.

Page 6
1.3 COMPANY PROFILE
COMPANY OVERVIEW

Incorporated in the year 1987, Allengers Medical Systems Ltd. is headquartered at

Chandigarh, India, and is one of the leading manufacturers and exporters of a wide range
of medical diagnostic equipment comprising X-ray systems, DR systems, DSA systems, C-
arms, Cathlabs, Remote controlled RF table, Mammography, Lithotripters, OPG, MPM,
ECG, EEG, EMG, PSG, etc.
Known for functionally superior and cost-effective nature, all the products offered
by us are manufactured using finest-quality raw material. By virtue of our quality, system
and safety standards we have certifications like CE, ISO 9001:2008, ISO 13485:2012,
AERB and BIS for our largest product range which caters to various medical applications
like: Radiology, Cardiology, Orthopaedics, Gastroenterology, Urology, Neurology,
Software, etc.
At Allengers, product development is a constant process and we are India’s only
company to introduce the nation’s first Mobile Digital Radiography system. What drives
our team of skilled professionals to put in relentless efforts is their quest to serve the
healthcare sector with excellence. On account of their dexterity to deliver better than the
best of services/solutions, we have been successfully catering to the needs of our global
clientele. Our team of experts is committed to work within a fixed time frame using the
brand’s modern manufacturing and testing facilities, spread over an area of 45,000 sqm.
True success is not achieved by individual glory but by virtue of the faith that our
customers have had in us, which encouraged us to continuously strive to bring accolades in
various realms, viz. Quality, Outstanding performances, Export excellence, Customer
satisfaction, Leadership, etc. These accolades were given by various National and
International bodies like the Ministry of MSME, PHD Chamber, Export Council, etc. But
all this would not have been possible without the continuous encouragement, feedbacks
and support we kept on having from the medical fraternity, which allowed us to reach the
desired outcome of being recognized as a brand committed to quality.

Page 7
 The brand has been enjoying almost 36.5% share in the Indian market and has been
reporting Compounded Annual Growth Rate of 27% for past five years. Over the past 10
years, its market credibility has helped it build a network of exporting to over 70 countries
across the globe and 43 sales and service centers in India, which further aided in delivering
after-sales services in an efficient manner.
By virtue of the customers’ trust, Allengers has entered into the 27th year of its
journey to excellence, which has enabled it to catapult to the topmost position in India and
truly making it into “An Indian MNC”.
Certifications and Accreditations
By virtue of our quality, system and safety standards, we have certifications like
CE, ISO 9001:2008, ISO 13485:2012, AERB and BIS for our largest product range, which
caters to various medical applications like Radiology, Cardiology, Orthopaedics,
Gastroenterology, Urology, Neurology, Software, etc.

CE: CE marking signifies that the product conforms to all EC directives that apply to it,
such as safety, health, and environmental protection, and has had them examined by a
notified conformity assessment body.
ISO: With regards to medical devices, there is no standard that better represents the
requirements for a comprehensive management system than an ISO that complies with the
Medical Device Directives.
AERB: All our X-ray based models adhere to AERB radiation safety norms in design,
installation and operation of X-ray equipment made for medical diagnostic purposes.
BIS: Through the BIS (Bureau of Indian Standards- A National Standards Body of India),
we adhere to their quality, safety and product reliability norms.
Achievements & Strengths

We take pride in sharing some of the achievements that we have achieved so far from
which we frequently draw our strengths!
 The Only Indian medical equipment manufacturing company bestowed with
“National Award for Quality Products”• from The Prime Minister of India on 1st
March 2014.
Page 8
 The Only Indian medical equipment manufacturing company bestowed with
“National Award for Outstanding Entrepreneurship” from The President of India
in 2010.
 Recipient of “Distinguished Entrepreneurship Award 2013″• from PHD
Chamber of Commerce and Industry (PHD CCI).
 Recognized as “Star Export House” by Ministry of Commerce and Industry,
Govt.of India.
 CRISIL assigns “A” category rating with a ‘stable’ outlook to Allengers and
adjudged it amongst 150 top companies in India under this Category.
 The only Indian manufacturer having largest manufacturing set up in India,
spread over an area of 45,000 sq.mtrs.
 More than 25,000 installations base across the globe, speaks volumes about our
customers’ trust in the brand “Allengers”•.
 As per world renowned research organization, Allengers is the only Indian
company that enjoys a market share of around 36.5% in the Indian market and
has a CAGR of 27% per annum for the last 5 years.
 The only Indian company that launched India’s first mobile digital radiography
system in the year 2011.
 The only Indian company that launched India’s first indigenous range of Cathlabs
in the year 2004.
 The only Indian manufacturer having battery powered mobile X-Ray machines
(15 KW/30 KW).
 The only Indian manufacturer having the largest rang of high frequency X-ray
machines (3.5 KW to 80 KW).
 Awarded with EEPC awards for the years 2009-10 & 2010-11.
 The only Indian company that exports to more than 70 countries in the continents
of Africa, Asia, South America, Europe, Middle East Countries and
Commonwealth Independent States (CIS).

Page 9
NATIONAL AWARD – 2012

Hon’ble Prime Minister of India Dr. Manmohan Singh honoured Sh. Suresh
Sharma, Chairman, Allengers Group of Companies with “National Award (1st Prize) for
manufacturing Quality Products (Electro medical Instruments / Equipments)” on 1st
March, 2014 at Vigyan Bhawan, New Delhi.

NATIONAL AWARD – 2010

In the realm of “Outstanding Performance in Entrepreneurship”-MSME engaged in

Page 10
 manufacturing.

Production Facilities

Allengers has an in-house R&D , Q.C setups and labs equipped with testing
equipment to keep check on raw materials in order to maintain quality of their product
range at their biggest manufacturing facilities near Chandigarh ( India ). Allengers has
always been encouraging Quality Technology Tools (QTT) to maintain and sustain their
quality. The enterprise has a team of skilled and experienced professionals and provides
regular trainings to their staff for quality assurance at all the 3 production facilities.
 2 Nos manufacturing units at Derabassi, Punjab (India)
Allengers Medical Systems Ltd was established in 1987. The company is located on
Bhankarpur Mubarakpur Road Derabassi, District Mohali (Punjab)
Since 1987 Allengers Medical Systems Ltd. is providing high quality medical technology,
service and productivity solutions in shape of X-Ray Machine, Mammography and Mobile
Cath Lab.

Page 11
Our new product introductions, growing services offerings and information technology
comprise our foundation for the next century.
Allengers has a market share of approximate 35% in Indian market and has maintained
consistent growth of 20-25% per annum for the last three years.
Products:-
1. Line frequency X-Rays
2. High frequency X-Ray Machine mobile
3. Line frequency C-Arm
4. High frequency C-Arm
5. Lithotripter
6. Mammography
7. Digital Subtraction Angiography System
8. Mobile Cath Lab
9. Digital Radiography
Company motto and goal:
 To be a best enterprise in its class.
 To be creative and to continuously improve in all areas to achieve total customer
satisfactions
 To achieve 100ppm
Facilities Available in AMSL:
 Machining Parts
 Powder Coating

Page 12
1.4 NEED FOR THE STUDY
Every organization needs inventory for smooth running of its activities. It serves as
a link between production and distribution processes. The investment in inventories
constitutes the most significant part of current assets/working capital in most of the
undertakings. Thus, it is very essential to have proper control and management of
inventories. The purpose of inventory management is to ensure availability of materials in
sufficient quantity as and when required and also to minimise investment in inventories.
So, in order to understand the nature of inventory management of the organization, I took
this Inventory Management as a topic for my project, to give findings and suggestions by
adopting and analyzing different inventory control techniques.

Page 13
 CHAPTER-II

REVIEW OF LITERATURE

2.1 MEANING OF INVENTORY

Inventory generally refers to the materials in stock. It is also called the idle resource
of a company. Inventories represent those items which are either stocked for sale or they
are in the process of manufacturing or they are in the form of materials which are yet to be
utilized.
It also refers to the stockpile of the products a firm would sell in future in the
normal course of business operations and the components that make up the product.
Inventory is a detailed list of those movable items which are necessary to
manufacture a product and to maintain the equipment and machinery in good working
order.

2.2 TYPES OF INVENTORIES

A manufacturing firm generally carries the following types of inventories:

1) Raw Materials.
2) Bought out parts.
3) Work-in-process inventory (WIP).
4) Finished goods inventories.
5) Maintenance, repair and operating stores.
6) Tools inventory.
7) Miscellaneous inventory.
8) Goods in transit.
9) Goods for resale.
10) Scrap Material.

2.3 REASONS FOR HOLDING INVENTORY

1) To stabilize production.
2) To take advantage of price discounts.
3) To meet the demand during the replenishment period.

Page 14
 4) To prevent loss of orders.
5) To keep pace with changing market conditions.
2.4 MOTIVES OF HOLDING INVENTORIES
 The Transaction Motive which facilitates continuous production and timely
execution of sales orders.
 The Precautionary Motive which necessities the holding of inventories for meeting
the unpredictable changes in demand and supplies of materials.
 The Speculative Motive which induces to keep inventories for taking advantage of
price fluctuations, saving in re-ordering costs and quantity discounts etc.,.
2.5 COSTS ASSOCIATED WITH INVENTORY
1) Carrying cost
2) Shortage cost
3) Cost of financing
4) Cost of ordering
5) Cost of stock out
6) Production cost
7) Capital cost

Costs involved in inventory:

Every firms maintains inventory depending upon requirement and other features of
firm for holding such inventory some cost will be incurred there are as follows:
Carrying Cost
This is the cost incurred in Keeping or maintaining an inventory of one unit of raw
materials, work-in -process or finished goods. Here there are two basic cost involved.
Cost of storage
It includes cost of storing one unit of raw materials by the firm. This cost may be
for the storage of materials. Like rent of spaces occupied by stock, stock for security, cost
of infrastructure, cost of insurance, and cost of pilferage, warehousing costs, handling cost
etc.

Page 15
Cost of financing
This cost includes the cost of funds invested in the inventories .It includes the
required rate of return on the investments in inventory in addition to storage cost etc. The
Carrying cost include therefore both real cost and opportunity cost associated with the
funds invested in the inventories.
The total carrying cost is entirely variable and rise in directly proportion to the
level of inventories carried.
Total carrying cost = (carrying Cost per unit) x (Average inventory)
Cost of ordering
The cost of ordering includes the cost of acquisitions of inventories. It is the cost of
preparation and execution of an order including cost of paper work and Communicating
with the supplier.
The total ordering cost is inversely proportion to annual inventory of firm. The
ordering cost may have a fixed component, which is not affected by the order size: and a
variable component, which changes with the order size.
Total Ordering Cost = (No.Of orders) x (cost per order).
Cost of stock out:

It is also called as Hidden cost. The stock out is the situation when the firm is not
having units of an item in stores but there is a demand for that Item either for the
customers or the production department .The stock out refers to zero level inventory .So
there is a cost of stock out in the sense that the firm face a situation of lost sales or back
orders .The stock outs are quite often expensive. Even the good will of firm also be
effected due to customers dissatisfaction and may lose business in case of finished goods,
where as in raw materials or work in process can cause the production process to stop and
it is expensive because employees will be paid for the time not spend in producing goods.

The carrying cost and the ordering cost are opposite forces and collectively. They
determine the level of inventors in a firm.

Total cost =(cost of items purchased) +(Total Carrying and ordering cost)

Page 16
Cost of production
The costs related to making or acquiring goods and services that directly generates
revenue for a firm. It comprises of direct costs and indirect costs. Direct costs are those that
are traceable to the creation of a product and include costs for materials and labor whereas
indirect costs refer to those costs that cannot be traced to the product such as overhead.
Capital Cost
The one-time costs associated with a project, including the price of purchased
assets such as land, equipment, or other supplies, and the cost of going into debt or issuing
stock in order to fund the project. Calculating alternate capital costs allow a business to
decide which funding models will provide the best net return on investments

Valuation of Inventory:

The methods of valuing inventory are combination of the actual cost and replacement
cost plans. The chief advantage of the cost or net realizable value rule is that it is
conservative. Hence the methods of Valuation of inventory are quite independent of
system of mincing.
In balance sheet closing stock is shown under current assets and is also credited to
manufacturing or trading accounts. The inventories are valued on the basis as follows.
 Cost of raw materials in stock may include freight charges and carrying cost. But
such cost should not exceed market price,
 Work -in -process is generally valued at cost, which includes cost of materials,
labor. And the proportionate factory overhead, as it is reasonable according to
degree of completion,
 Cost of finished goods wound normally to be total or full cost it includes prime cost
plus appropriate amount of the overhead. Selling and distribution cost is deducted
on the other hand work in progress may be valued at work in progress may be
Valued at work cost, marginal cost, prime cost or, even at direct materials.
2.6 INVENTORY CONTROL

The main objective of inventory control is to achieve maximum efficiency in

production & sales with minimum investment in inventory.

Page 17
 Inventory control is a planned approach of determining what to order, when to
order and how much to order and how much to stock, so that costs associated with buying
and storing are optimal without interrupting production and sales.
2.7 BENEFITS OF INVENTORY CONTROL

The benefits of inventory control are:

1) Improvement in customers’ relationship because of the timely delivery of goods

and services.
2) Smooth and uninterrupted production and hence, no stock out.
3) Efficient utilization of working capital.
4) Economy in purchasing.
5) Eliminating the possibility of duplicate ordering.
2.8 PRINCIPLES OF INVENTORY CONTROL

1) Inventory is only created by spending money for materials and the labour and
overhead to process the materials.
2) Inventory is reduced through sales and scrapping.
3) Accurate sales & production schedule forecasts are essential for efficient
purchasing, handing & investment in inventory.
4) Management policies which are designed to effectively balance size and variety of
inventory with cost of carrying that inventory are the greatest factor in determining
inventory investment.
5) Forecasts help determine when to order materials. Controlling inventory is
accomplished through scheduling production.
6) Records do not produce control.
7) Control is comparative & relative, not absolute. It is exercised through people with
varying experiences and judgment rules & procedures establish a base from which
the individuals can make evaluation and decision.
8) With the consistent practices being followed, inventory control can become
predictable and properly related to production and sales activity.

Page 18
2.9 INVENTORY CONTROL – TERMINOLOGY

 Demand:
It is the number of items required per unit of time. The demand may be either
deterministic or probabilistic in nature.

 Order cycle:
The time period between two successive orders is called order cycle.
 Lead time:
The length of time between placing an order and receipts of items is called lead
time.
 Safety stock:
It is also called buffer stock or minimum stock. It is the stock or inventory needed to
account for delays in materials supply and to account for sudden increase in demand
due to rush orders.
 Inventory turnover:
If the company maintains inventories equal to 3 months consumption. It
means that inventory turnover is 4 times a year i.e., the entire inventory is used up and
replaced 4 times a year.
 Fixed order quantity or two bin system
The record of the level is checked and order record will be placed after reacting a
specific point. This is known as fixed quantity or two bin system of inventory.
 Periodic review system
Inventory levels are reviewed at fixed time intervals and then orders are placed at
such intervals.
 Maximum stock
A stock level selected as the maximum desirable which is used as an indicator to
show when stocks have rises too high.

Page 19
  Reorder level
The point fixed between maximum and minimum stock levels at which time it is
essential to initiate purchase requisition and manufacturing requisition for fresh supplies of
the material.
 Reorder quantity
This is the quantity of the replacement order
 Economic order quantity
Economic order quantity is the one for which the aggregate of the costs of ordering
the inventory and the costs of carrying the inventory is at minimum.
Definition:

The term inventory refers to assets, which will be sold in future in the normal
course of business operations. The assets, which the firm stores as inventory in anticipation
of need, are raw materials, work-in-progress/process, and finished goods.
Inventory often constitutes a major element of a total working capital and hence ft
has been correctly observed, 'Good inventory management is good financial management’.
Inventory control is a system, which ensures the provision of the required quantity
at the required time with the minimum amount of capital.

Inventories are the second largest asset category for the manufacturing firms next to
plant and equipment.

Inventory control includes scheduling, the requirements, purchasing, receiving and

inspecting, maintaining stock records and stock control. Inventory control is a matter of
coordination. A proper material control helps in improving the input-output ratio.
2.10 INVENTORY COST RELATIONSHIPS

There are two major cost associated with inventory. Procurement cost and carrying
cost. Annual procurement cost varies with the numbers of orders. This implies that the
procurement cost will be high, if the item is procured frequently in small lots. The annual
procurement cost is directly proportional to the quantity in stock. The inventory carrying
cost decreases, if the quantity ordered per order is small. The two costs are diametrically
opposite to each other. The right quantity to be ordered is one that strikes a balance

Page 20
between the two opposition costs. This quantity is referred to as “Economic Order
Quantity”.

2.11 OBJECTIVES OF INVENTORY CONTROL

Inventory control is a highly significant function because it consist substantial

portion of total current asset of a firm.
To minimize the investment in inventories: The main objective of a system of inventory
control is minimizing the capital blocked in the inventories.
The capital required to carry inventories costs money and holding asset in the form
of inventories results in decreased liquidity.
To ensure that the value of material consumed to minimum: To ensure this objective
there should be proper control of materials from the placing of orders with supplies fill the
materials have been efficiently utilized in production. Efficient purchasing, storage,
consumption and accounting for materials are an important objective of inventory control.
To provide scientific control: To provide scientific base for short term and long term
planning of inventory requirements.
To protect from losses: The inventories storage from pilferage, theft, wastage, damage
and unauthorized use.
To reduce surplus stock: reducing of surplus stock is one of the essential requirements of
effective inventory control. Inventory controls critically examines excessive stock and take
appropriate measures to bring down stock to a reasonable level and then by reduce
investment. Inventory control takes timely action for replenishment. It also provides a safe
guard for variations in raw material delivery time or lead time.

2.12 ISSUE PRICING METHODS:

There are two categories:

(i) Cost prices:

a. FIFO (First in First out)

b. LIFO (last in first out)
c. Specific price

Page 21
 d. Base stock price
e. HIFO (highest in first out)
(ii) Derived from cost prices:
a. Simple average price
b. Weighted average price
c. Periodic simple average price
d. Periodic weighted average price
e. Moving simple average price
f. Moving weighted average price
(iii) Notional prices:
a. Standard price
b. Inflated price
c. Re-use price
d. Replacement price
First in First out (FIFO)
This is the price paid for the material first taken into stock from which the material
to be priced could have been drawn.
Under this method stocks of materials may not be used up in chronological order
but for pricing purpose it is assumed that items longest in stock are used up first. The
method is most suitable for use where in material is slow-moving and comparatively high
unit cost.
Advantages:

i. Price is based on actual cost and not on basis of approximations such as no profits
or losses arises by reasons of adopting this method.
ii. The resulting stock balance generally represents fair commercial valuation of stock.
iii. It is based on traditional principles.
Disadvantages:
i. The number of calculations in the stores ledger involved tends to be complicated
with increase in clerical error.
ii. The cost of consecutive similar jobs will differ if the price changes suddenly,
Page 22
 iii. In times of rising prices, the charge to production is unduly low as the cost of
replacing the material will be higher.
Last in first out (LIFO)
This is the price paid for the material last taken into stock from which the materials
to be priced could have been drawn. This method also ensure material being issued at the
actual cost. Its use is based on the principle that costs should be as closely as possible
related to current price level. Under this method production cost is calculated on basis on
replacement cost.
Advantages:

i. Production is charged at the most recent prices so that it is based on the principle
that cost should be related to current price levels.
ii. It obviates the necessity for continuously ascertaining the replacement price.
iii. Neither profit nor loss is usually made by using this method.
iv. In the times of rising prices there is no wind fall profit as would have been obtained
under FIFO method.

Disadvantages:

i. Needs more clerical work.

ii. Compassion among similar jobs is very difficult.
iii. Stock valves relating to prices of the oldest cost on hand may be entirely out of the
current replacement prices.

Weighted average price:

This is the price which is calculated by dividing the total cost of material in the
stock from which the material to be priced have been drawn, by the total quantity of
material in the stock. This method differs from all other methods because here issue prices
are calculated on receipts of materials and not on issue of materials. Thus as soon as new
lot is received a new price is calculated and issues are then taken.

Page 23
 Advantages:

i. This method is advantageous where the price varies widely as its use even out the
effect of these wide variations.
ii. The basis of price calculations is a simple one involving only the division of total
amount of material in stock by quantity in stock.
iii. Calculation of new prices arises only when receipt of stocks are received.
iv. Stock records under this method give a fair indication of the stock values, which
can be used in financial analysis.

Disadvantages:

This method is completed than simple average because it takes into consideration the
total quantities and total costs in stock.

i. Profit or loss may be incurred as in simple average price,

ii. As LIFO or FIFO this method calls for many calculations,
iii. In order to calculate the accurate value of issues the average price must normally be
calculated to four to five decimal places.

Standard price:

It is the predetermination of fixed price on basis of a specification of all factors

affecting price like the quantity of materials in hand and to be normally purchased and rate
of discount compared with existing price including or excluding freight and ware housing
expense.

A standard price for each material is set and the actual price paid is compared with
standard. It is paid exceeds the standard a loss will be realized if not profit will be
obtained.

Page 24
Advantages:

i. This method is easy to operate.

ii. Comparing the actual prices with the standard price will determine the efficiency of
purchase department.
iii. The effect of price variations is eliminated from job costs.
iv. It reduces classical costs by eliminating detailed cost records.
v. In times of inflation or price fluctuations is very difficult to fix a standard price.
vi. This method also incurs a profit or loss on issues and closing stock.

Inflated price:

This is the price, which includes a charge designed to cover the cost of
contingencies or related costs. This price includes not only the cost involved in bringing
the material to the purchases premises but also the loss due to evaporation and breakage
etc. as well as carrying costs.

2.13 PURCHASE AND STORE PROCEDURE

Purchase of material is one of the important function of material management. At

times more than 50% of the total product cost is material.

Functions of Purchase Department

1. Deciding the items to be purchased based on demand.

2. Selection of sources of supply.
3. Collection the price information.
4. Placing the ordered.
5. Follow-up the ordered.
6. Checking the invoices.
7. Maintenance of purchase records.
8. Maintenance of vendor’s relations.

Page 25
 Purchasing procedure start with the initiation of purchase requisitions and ends
with the receipt of materials in the stores.

CENTERIZED PURCHASING

It is most important and relevant to large organizations operating deferent plants

may or may not be located at different places. For a single place organization
decentralization might be feasible on a very limited place. But where as M & M Ltd., is a
multiple plants operating organization.

In Mahindra and Mahindra Centralized purchasing procedure is following to purchase

of materials.

1. Centralized purchasing avoids duplications of efforts and working at cross purpose

from one plant to another.
2. Centralized purchasing permits consolidation of order of materials commonly used
for two or more plants. The ultimately results in greater buying power, favorable
contracts and trade agreements.
3. Easier to maintain the quality of purchased parts / items through centralized testing
and inspection. It is also possible to conduct testing and inspection facilities.
4. Centralized purchasing permits to avail facilities like quantity discounts and cash
discounts thus its helps to reduce cost.
5. It is beneficial to vendor also in case the size of order constituted major proportion
of his total production capacity
In inventory management the purchase department store department plays a major
role to be the effective inventory there must be cooperation of various departments such as
purchase receiving and inspection stores production and stock control departments. The
main functions of each department are as follows:

Purchase Department

It is responsible for purchase of all necessary goods of proper quality to produces,

without interruption to supply the finished goods.
Page 26
 1) It receives purchase requisitions.

2) Invites quotations or tenders from suppliers with desired quality.

3) Issue purchase orders to the selected supplier.

4) Certify the quality and quantity of order received in specified time

5) Approve purchase invoice for payment after checking invoice for paying after
checking prices and extensions if any needed.

Material Cost

Materials cost of a job or cost unit can be ascertained by multiplying the quantity
consumed for the job or cost unit by the price of the materials. For ascertaining the
quantity consumed for each job or cost unit we have devised material requisition which
will indicate the quantity required for the job and the job number against which the
material cost will be change directly. For indirect material issued the material requisition
will not indicate the job number but the cost center number will be indicated for charging
to relevant cost center as indirect materials.

Thus in order to ascertain material cost.

1) Make valuation of purchase.

2) Make use of proper valuation of material issue and closing stock following
different method such as, FIFO, LIFO WEIGHTED AVG. Etc.

The purchase price of material is directly obtained from the suppliers receives and
have to be issued to production before the invoice of materials is received.

The rate per unit, total price of the item as shown in the purchase order plus sundry
charges such as delivery and forwarding charges sales tax, duty etc, may be borne by
suppliers, governments controlled prices by notifications, suppliers, catalogues and
circulars may be valuable guides for obtaining rates of materials.

Page 27
 Delivery charges may be estimated with reference to the kind of transport with charges
incurred. The price may also include sales tax, excise duty, fright etc, so the total cost and
rate per unit can be computed and entered in the stores received registered and posted to
stores ledger for the issue of material to production.

In some cases material needs adjustment for any discount allowed charges for transport
containers etc.

Discounts may be like trade discounts quantity discount, cash discounts etc.
Transportation and storage costs may not include the cost of air, sea on land transport and
other stores costs, where the purchaser has to bear the costs. Cost of containers with
regarded may not make a separate charge because of non refundable and also sales tax,
excise duty, insurance etc., all the items are added to Purchase price.
Receiving and Inspection Department

a) Receiving all raw materials and other supplies from various suppliers.

b) Verify items by count, weight etc., and report any shortage

c) Inspect materials and supplied as to quality by analyzing them suitably.

d) Inform the purchasing department and accounts department all facts that may
require adjustment with vendor.

e) Analyze and give them the code depending up on the type of materials.

Stores Keeping Department

a) Check and accept all materials form the received department.

b) Identity each material received with the stock list, check the code number and place
in the

c) respective bins.

d) Issue materials and supplies for use upon presentation of authorized requirement.

Page 28
e) Record quantities received and issued on bin lards or stock ledger cards consisting
the

f) Perpetual inventory records.

Production Department

Make out materials requirement note i.e. requisition of requisite quantity and
quality of materials at the right moment so the all materials may be available without delay
on production.

1) Check and verify that the materials of requisite quantity and quality have been
received and charged to production.

2) Keep proper records or materials received and their progress through different
operations or progress.

3) Prepare materials return note for excess materials.

4) Prepare materials transfer note to cover any transfer of materials.

5) Prepare report on scrap for reporting to management.

Inventory Control Department

In may be a subdivision of the cost accounting department, although in many

concerns, it is a part of the stores keeping department.

A) It keeps perpetual inventory records.

B) Adjust the stock on receipt of the property authorized adjustment notes.

C) Prepare weekly or monthly, statement of receipts, issue, balance and average

consumption of materials both in terms of quantity and value.

RECEIPT AND ISSUE OF INVENTORIES:

Receipt Inventories in to store:

After incoming materials have been examined and approved they are passed on to
the appropriate stores together with the goods received note. Articles are inspected and

Page 29
passed and on the stores in the usual way. In order to keep the accounting procedure
uniform, it is desirable that a goods received note be prepared for these articles also, the
store keeper than places the inventory in appropriate bin or shelf and make necessary
entries in the receipt column of the Bin Card.

A location code for materials helps in proper store - keeping with greater
efficiency, because stores can be easily identified. It is a part and parcel of stock control
procedure. Location code helps in mechanized accounting and safeguard against omission
in counting as verification.

BIN CARD

For each kind of materials or article a Bin Card attached to the bin which each
individual’s materials is stored. A bin card provides a running record of receipts, issues
and stock in the simplest form. An entry will be made at the time of each receipt or issue
and new balance will be extended.

These cards should agree with the quantities entered in the relevant accounts in the
stores ledge. The main advantage is to enable the stores keeper to ascertain at a glance the
quantity of materials in stock and remind him to place purchase requisition for further
suppliers the ordering level has been reached more over they provide on independent check
on stores ledger and anciently a second perpetual inventory. If the bin card is from three
years then the transactions are made in same card. If Bin Card does not exist new Bin Card
to be opened.
Issue of Material from Stores

The storekeeper issue materials on receipt of proper authorized document usually

called a materials requisition or a specification of material. Material requisition is a
document which authorities and records the issue of materials for use.
The materials requisition details the items required for the showing the quantity,
description, and code or past number and the cost center of job to be charged. Requisition
is normally prepared in triplicate: the department receiving the goods retains one copy and
the other two copies are handed over to the two copies are handed over to the storekeeper.

Page 30
He keeps one along with him and enters on the issue sides of the appropriate bin card day –
today transactions are noted in stores ledger. Stores ledger:
The stores ledger which is usually a loose leaf or card type , contains an account for
each
class of materials their ledger is kept in the cost department and contains such information
as well facilitate the ascertainment of all details relating to the materials in the minimum of
time.
Materials returned to Stores
Where materials are issued in excess of requirement the excess quantity is return to
the stores together with materials return note.
Since the materials return to store form a works order is a reduction in the amount
recorded as issued, the preferable entry is to enter the number of units and the value of
materials returned and received in a different work in the issue column of the stores ledger
account.
These values are deducted from total issues, and amount returned by each
department as shown by materials return note is deducted where return of materials to
stores return of material to stores is a major problem it is customary to use a materials and
supplies journal for keeping records of items.
Transfer of materials

Transfer of materials form one job to another is prohibited unless the detail is
adequately recorded on the materials Transfer note. Such transfer is permissible only
where an urgent order has to be made and work started on a less urgent order may be
appropriates. Such a note shows are incessancy date for ordering and debiting the cost
accounts affected. These not are passed direct to the cost office for the appropriate
adjustment in the work - in -progress ledger.
All these four notes including stores ledger and bin card are major for inventory
management which are valued and checked for every quarterly of half yearly or annual

Page 31
Valuation of Materials Issues
a) The fixation of the price at which the materials are issued are to be charged to
production is an important one from the point of view to inventory management.
These are numerous factors to be taken into amount in pricing the material they are.
b) The nature of the business and type of production. The frequency of purchase price
fluctuations and issues of materials.
c) Rang of price fluctuation and value of material issued and size of bath of materials
issued.
d) Requirement that purchasing efficiency should be revealed or not.
e) The accuracy with which issues can be computed.
f) The durability of stock i.e. whether it evaporates absorbs moisture or deteriorates
quickly.
g) The length of inventory turnover period and quantity of material to be handled with
the necessity for maintaining uniformity within an industry.

2.14 ECONOMIC ORDER QUANTITY

MEANING

A decision about how much to order has great significance in inventory

management. The quantity to be purchased should neither be small nor big because costs
of buying and carrying materials are very high. Economic order quantity is the size of the
lot to be purchased which is economically viable. This is the quantity of materials which
can be purchased at minimum costs. Generally economic order quantity is the point at
which inventory carrying costs are equal to order costs. In determining economic order
quantity it is assumed that cost of managing inventory is made up solely of two parts i.e.,
ordering cost and carrying cost. The cost relationships are shown in below figure.

FORMULA FOR CALCULATING ECONOMIC ORDER QUANTITY (EOQ)

Page 32
 Economic Order Quantity

Costs Annual Total Cost

Annual Inventory Carrying Cost

Annual Ordering Cost

Q* Economic Order Quantity

Order Quantity

2.15 SAFETY STOCK

MEANING
The economic order quantity formula is developed based on assumption that the
demand is known and certain and that the lead time is constant and does not vary. In actual
practical situations, there is an uncertainty with respect to the both demand as well as lead
time. The total forecasted demand may be more or less than actual demand and the lead
time may vary from estimated time. In order to minimize the effect of uncertainty due to
demand and the lead time, a firm maintains safety stock, reserve stocks or buffer stocks.
The safety stock is defined as “the additional stock of material to be maintained in
order to meet the unanticipated increase in demand arising out of uncontrollable factors”.
In simple it is tells about which is used to protect against uncertainties.
Because it is difficult to predict the exact amount of safety stock to be maintained,
by using statistical methods and simulation, it is possible to determine the level of safety
stock to be maintained.

Page 33
DETERMINATION OF SAFETY STOCK
If the level of safety stock is maintained is high, it locks up the capital and there is a
possibility of risk of obsolescence. On the other hand, if it is low, there is a risk of stock
out because of which there may be stoppage of production. When the variation in lead time
is predominant, the safety stock can be computed as:

Safety Stock = (Maximum Lead time- Normal Lead time) * Demand

SAFETY STOCK

The service level of inventory thus depends upon the level safety stocks. Large the safety
stocks, there is a lesser risk of stock out and, hence, higher service level. Sometimes higher
service levels are not desirable as they result in increase in costs, thus, fixing up a safety
stock level is critical. Using past date regarding the demand and lead time data, reliability
of suppliers and service level desired by management, safety stock can be determined with
accuracy.

Page 34
2.16 ABC ANALYSIS
MEANING

The inventory of an organization generally consists of thousands of items with

varying prices, usage rate and lead time. It is neither desirable nor possible to pay equal
attention of all items.
ABC analysis is a basic analytical tool which enables management to concentrate
its efforts where results will be greater. The concept applied to inventory is called as ABC
analysis.
Statistics reveal that just a few items account for bulk of the annual consumption of
the materials. These few items are called A class items which hold the key to business. The
other items known as B & C which are numerous in number but their contribution is less
significant. ABC analysis thus tends to segregate the items into three categories A,B & C
on the basis of their values. The categorization is made to pay right attention and control
demanded by items.

FEATURES OF ABC ANALYSIS

A Class (High Value) B Class (Moderate Value) C Class (Low Value)

1. Tight control on Moderate control Less control

stock levels
2. Low safety stock
3. Ordered frequently Medium Large
4. Individual posting in
stores Less frequently Bulk ordering
5. Weekly control
Individual Collective posting
reports
6. Continuous effort to
reduce lead time
Monthly control Quarterly control

Moderate efforts Minimum efforts

Page 35
ADVANTAGES

 This approach helps the manager to exercise selective control & focus his attention only on
a few items.
 By exercising strict control on A class items, the materials manager is able to show the
results within a short period of time.
 It results in reducer clerical costs, saves time and effort and results in better planning and
control and increased inventory turnover.
 ABC analysis, thus, tries to focus and direct the effort based on the merit of the items and,
thus, becomes an effective management control tool.

Limitations of ABC Analysis

i) Low value purchases frequently require more items and there by reduce the time available for
value analysis, vendor investigation.
ii) Classifications of items should be reviewed and updated periodically otherwise the very
approach of control may be defected.

2.17 FSN ANALYSIS

All the items in the inventory are not required at the same frequency. Some are
required regularly, some occasionally and some very rarely. FSN analysis classifies
items into fast moving, slow moving, non moving items.

2.18 INVENTORY TURNOVER RATIO

Kohler defines inventory turnover as “a ratio which measures the number of times a
firm’s average inventory is sold during a year”.
A higher turnover rate indicates that the material in question is a fast moving one.
A low turnover rate, on the other hand, indicates over-investment and locking up of
working capital on undesirable items.
Inventory turnover ratio may be calculated in different ways by changing the
numerator, but keeping the same denominator. For instance, the numerator may be

Page 36
materials consumed, cost of goods sold or net sales. Based on any one of these, the ratio
differs from industry to industry.
Stock turnover is measured in terms of the ratio of the value of materials consumed
to the average inventory during the period. the ratio indicates the number of times the
average inventory is consumed and replenished. By diving no. of days in a yeat by
turnover ratio, the number of days for which the average inventory is held, can be
ascertained.
Comparing the no. days in the case of two different materials, it is possible to know
which is fast moving & which is slow moving. On that basis, attempt may be made to
reduce the amount of capital locked up, and prevent over-stocking of slow moving items.
Net sales
Inventory turnover ratio =
Avg. inventory

No. of days in a year

Inventory velocity =
Inventory turnover ratio
2.19 VED ANALYSIS:

Vital Essential and Desirable analysis is done mainly for control of spare parts
keeping in view of the criticality to production.

Vital spares are spare the stock-out of which even for a short time will stop
production for quite some time. Essential spares are spares the absence of which cannot be
tolerated for more than a few hours a day. Desirable spares are those, which are needed,
but their absence for even a week or so will lead to stoppage of production.
2.20 THE RE-ORDER LEVEL:

The re-order level is the level of inventory at which the fresh order for that item
must be placed to procure fresh supply. The re-order level depends upon

a) Length of time between the placement of an order and receiving the supply.
b) The usage rate of the item. The inventory is constantly being used up. The rate at
which the inventory is being used up. The rate at which the inventory is being used

Page 37
 up is called the usage rate.
The reorder level can be determined as follows:
R = M+tu
R = Reorder level
M = Minimum level of inventory
T = Time gap / delivery time
U = Usage rate
The reorder level and inventory patterns have be shown as follows:

The figure shows that if the usage rate is constant, the orders are made at even intervals for
the same amounts each time and the inventory goes to zero just before an order is received.

2 .21 JUST-IN-TIME INVENTORY:

The basic concept is that every firm should keep a minimum level of inventory on
hand, relying suppliers to furnish stock just in time as and when required. JIT helps in
emphasizing sufficient levels of stocks to ensure that production will not be interrupted.
Although the large inventories may be bad idea due to heavy carrying JIT is a modern
approach to inventory management and the goal is essentially to minimize such inventories
and there by maximizing the turnover.

JIT system significantly reduces inventory-carrying cost by requiring that the raw
materials be procured just in time to be placed into production. Additionally the work in

Page 38
process inventory is minimized by eliminating inventory is minimized by eliminating
inventory buffers between different production departments.
If JIT is to be implemented successfully there must be a high degree of
coordination and co-operation between the supplier and manufacturer and among different
production centers. JIT does not appear to have any relation with EOQ however it is in fact
alters some of the assumptions of EOQ model. The average inventory level under the EOQ
model is defined as
Average inventory= 1/2 EOQ + safety level JIT attacks this equation in two ways.
(i) By reducing the ordering cost
(ii) By reducing the safety stock.

The basic philosophy in JIT is that the benefits, associated with reducing inventory and
delivery time to a bare minimum through adjustment in the EOQ model; will more than
offset the costs associated with the increased possibility of stock-outs.

Page 39
2.22 A STUDY ON INVENTORY MANAGEMENT BY RAMYA
In this review Miss. RAMYA, who as done the project about Inventories at
WOIL, it is constitute the most significant part of the current assets of a large majority of
companies in India. Raw materials, goods in process and finished goods all represent
various forms of inventory. Each type represents money tied up until the inventory leaves
the company as purchased products. Because of the large size of the inventories maintained
by firms, a considerable amount of funds is required to be committed to them. It is
therefore absolutely imperative to manage inventories efficiently and effectively in order to
avoid unnecessary investments. One of the most critical and time-consuming aspects of
manufacturing is managing the tasks of maintaining sufficient amounts of materials on
hand at all times. One of the main areas of the project is the analysis part where the data
obtained from the existing study is been utilized. For the analysis part, ABC analysis was
carried out. The norms were fixed for each of the inventory part taken into account for the
project. There by the inventory to be kept for the production of each model was also
arrived at.
2.23 A REPORT ON INVENTORY MANAGEMENT BY VIJAYARAMAN
In this review Mr. VIJAYARAMAN .R, who as done the project about A report
Inventory at WOIL, an Inventory Management System is an essential element in an
organization. It is comprised of a series of processes which provide an assessment of the
organization’s inventory. The Inventory Management System also aids the organization in
achieving its goals and objectives with the primary focus on adding value for the
customers. The management of inventory adds value for customers (quality, speed,
flexibility, and cost), and this is the primary consideration of the Operations Management
System. Inventory management is possibly one of the richest areas of operations
management, with many tools and techniques available to help managers run their
processes as effectively as possible.
In this project he made an analysis for Export Oriented Units (EOU) and fixing
norms for Coffee Maker, Coffee Grinder, Grind Mill & Micro Oven. After finishing
analysis he compares between the Suggested norms and Existing norms. He also made an
analysis of Washing Machine and their norms for different classification of Washers at

Page 40
WOIL. Finally he used correlation with Statistical Tools. He also classified EOU’s &
Washers products with ABC Classification.
2.24 INVENTORY AS MANAGING INVENTORY BY WOLFE BAGBY
In this review Mr. WOLFE BAGBY explains inventory as Managing inventory to
Meet Profit Goals, Shortening the cash cycle, avoiding inventory shortage, Avoid
excessive carrying costs for unused inventory, Improving profitability by decreasing cash
conversion, JIT.

Getting smart about inventory

When a manufacturing firm works to gain greater control over management of its
inventory, it helps to know what this means for a company. For starters, maximizing a
manufacturer’s cash flow and profitability includes keeping a watchful, discerning eye on
changes in supply and demand, which means simultaneously scrutinizing external factors
that might affect supply and demand.
Shortening the cash conversion cycle
Much of this can be accomplished when manufacturers update their scheduling
systems. The Web-based nature of an inventory management system allows Electronic data
interchange of projected demand and vendor requirements are transmitted throughout the
distribution network. This, in turn, keeps the networks, production and deliveries in near
real-time synchronization with the latest network inventory, forecast and actual demand
information. Another way to shorten the cash conversion cycle is to have clear channels of
communication with vendors. Still, advanced inventory management software is nothing
without a strong internal supply chain, especially when loyal employees who want to work
on behalf of the company’s goals support it.
Avoiding inventory shortage
Most manufacturers recognize that supplier inventories are important. Even though
more stock means higher total costs, the alternative is often too little stock which tends to
put the brakes on operations. This means negative impact in more ways than one. One
obvious way to take precautions for avoiding inventory shortage is by using more than one
vendor in particular areas of the supply chain.

Page 41
Avoid excessive carrying costs for unused inventory
Most companies need to reduce inventory in whatever way seems most reasonable,
considering the variables faced by the manufacturer. This isn’t to say that manufacturing
firms will be eliminating warehousing anytime soon. But, it is important to note that
drastic reductions in inventory costs are available to most any company that wants better
control. Much of this effort deals with building collaborative relationships with suppliers to
the point where most inventory-related matters can be worked out. Consignment inventory
is another way to save inventory costs. Give someone else the responsibility for moving
inventory so it doesn’t cost the manufacturer as much to hold onto it
Improving profitability by decreasing cash conversion
Boosting financial performance is another benefit that comes from better inventory
management. In fact, a large number of manufacturers enjoy significant savings and better
performance by choosing the approach to inventory reduction that works best for them.
One vital measurement for determining how effectively a manufacturer’s inventory
management system is operating is referred to as inventory turnover. Essentially, it
measures how efficiently inventory moves through the organization. In fact, manufacturing
executives are told never to underestimate the importance of inventory turns. Gaining
better control over accounts receivables policies is another popularly reported approach for
using inventory to improve profitability. Depending upon the nature of business, early or
on-time payment discounts can be the incentive for moving inventory faster.
JIT
For years, American manufacturers have strived for improved inventory
management systems. The closer they get to carry zero inventories, the closer they get to
reach the manufacturing efficiency. Such thinking, combined with today’s available
technology, has brought inventory management systems to a new level. Manufacturers can
now meet their customers’ demand without incurring the costs and burdens that come from
stocking excess inventory. Features such as effective forecasting, vendor management and
data management control make it possible for manufacturers to achieve a much higher rate
of efficiency. These features enable manufacturers to seek to manage inventory as a
financial investment, as well as a method for putting more money in their pockets.

Page 42
2.25 A STUDY ON INVENTORY MANAGEMENT BY CHARLES ATKINSON
In this review Mr. CHARLES ATKINSON explains inventory as inventory
management topics, he explains average inventory levels, in this topic he explained about
two parts. The first half part of this article covers how to find what inventory levels should
be, and the second half covers how to evaluate it..

Average Inventory Levels

Part I: How to Optimize Average Inventory Levels?

In this part, it provides a brief description for how optimal inventory levels for
materials are kept. Essentially, this section can serve as a starting point for inventory
managers. The First thing he determines the ideal inventory levels is a material's Economic
Order Quantity (EOQ). This is the amount one should be ordering when you place orders.
Next he determines Safety Stock (SS). This is the amount that you should have
remaining when the EOQ arrives. This should be intuitive because safety is what you have
when your shipment arrives and when the order arrives (EOQ) it gets added to the safety
stock.
It is clear that average minimum and maximum level because you might not receive
the EOQ exactly when you planned to and therefore may have more or less. On average
you should have the SS amount when you receive shipments. Between these two average
minimum and maximum values lies your long-term average inventory.
Part II: How to Assess (evaluate) Inventory Levels?
Average Inventory can be calculated by Simplistic Method.
Most methods of accounting take the beginning inventory of a period, add it to the
ending inventory of a period, and divide by 2. This essentially provides the mathematical
average for a given month.
Avg. Inventory = (Beginning Inventory+ (Beginning Inventory + Units Produced-
Units Sold))/2
Or more simply:
Avg. Inventory = (Beginning Inventory + Ending Inventory)/2

Page 43
2.26 SELECTIVE INVENTORY CONTROL MANAGEMENT
A manufacturing (or) industrial firm generally comprises thousands of items with
diverse prices, usage and lead-time, procurement and technical problems. The industry
should not exercise same degree of control over all those items. The industry should pay
more attention and care to those items whose usage value us high and less attention to
those whose consumption value is low. The industry should select an approach to control
its inventory and these by cutting investment unnecessarily blocking in various types of
inventories. The selective approach is known as ‘selective inventory control’ system, this
method takes the following into consideration.
i) Different Inventory Level
ii) Order quantity
iii) Monetary value of material
iv) Extent and closeness of the control desired.
Techniques of selective inventory control
1) ABC analysis (Always Better Control): This analysis is based on values of
consumption.
2) HML analysis (High, Medium, and Low): this analysis is based on volume.
3) FSND analysis (fast moving, slow moving, non-moving, dead): this base on
consumption pattern of the component.
4) SDE analysis (scarce, difficult, and easy): this based on problems faced in
procurement.
5) VED analysis (vital, essential, and desirable): this based on critically of the
component
6) XYZ analysis: this based on value of item in storage.
2.27 CODIFICATION OF MATERIALS
Identification or codification of material is essential for every material manager. This may
be helpful to stores personnel in carrying out their operation speedily & effectively.
Merits of codification
In order to avoid multiplication of item, to facilitate easy location a proper
codification is to be evolved so as to obtain they following benefits.

Page 44
1) To avoid long and unwieldy description
2) To present duplication
3) To standardize ht items
4) To reduce varieties
5) To have efficient purchasing dept
6) To assure production as planned and as required.

Page 45
 CHAPTER-III

OBJECTIVES OF THE STUDY

PRIMARY OBJECTIVE
 Overall, the objective is to minimize the investment in inventories by excising selective
inventory control techniques.

SECONDARY OBJECTIVE

1. To study the tools and techniques of inventory management adopted at AMSL.

2. To study how ABC analysis and aging schedule is implemented in inventory

management.

3. To determine the stock level in inventory management at AMSL.

4. To study the methods of valuation of inventory on AMSL.

5. To study the inventory management procedure.

6. To minimize the investment in inventories

7. To reduce surplus stock

Page 46
 CHAPTER-IV
RESEARCH METHODOLOGY
4.1 RESEARCH METHODOLOGY OF DATA COLLECTION
Research is a process in which the researcher wishes to find out the end result for a
given problem and thus the solution helps in future course of action. The research has been
defined as “A careful investigation or enquiry especially through search for new facts in
branch of knowledge”

 Primary data

The primary data is collected by personal interviews with officials.

 Secondary data

1. Files, annual reports, periodicals, manual and text book. Which have already been
passed through the statistical process are the secondary data used. Data are collected from the
company’s website. Books and journals pertaining to the topic.

 Field work
This was under taken individually to collect various information regarding the
study by visiting following sections.

 Stores department
Information regarding stocking of materials receipts and issues to workshops.
Inventory control procedures in various wards inside the department were obtained.
 Accounts department
Remaining all the information was obtained from accounts department through
personal interviews with section officials.
 Plan of analysis

The analysis and interpretation was collected from finance department thus
processed and tabulated is in the form of tables and graphs. The table thus obtained by
calculating average, percentage, turnover ratio, graphs and diagram in respect of the stock
of raw materials sales & inventory control procedures and thus to draw conclusion from
the analysis done.

Page 47
4.2 TOOLS USED IN THE ANALYSIS
 Economic Order Quantity
 Safety Stock
 ABC Analysis
 FSN Analysis
 Inventory turnover ratios
 VED Analysis
4.3 PERIOD OF STUDY
The period of the study at Allengers Medical Systems Limited, Baddi.

Page 48
 CHAPTER-V
DATA ANALYSIS AND INTERPRETATION
5.1 ANALYSIS OF THE ECONOMIC ORDER QUANTITY

Economic order quantity is the size of the order representing standard quality of the
material and it is the one for which the aggregate of the costs of procuring the inventory
and the costs of holding the inventory is minimum.
APPROACH TO EOQ
1) Tabular approach
This approach is one of the simple methods to find economic order quantity. The
methods of calculating tabular approach as follows
a) Select a number of possible lot sizes to purchase
b) Determine the total costs for each lot size chosen
c) Select the ordering quantity that minimizes the total costs.
But, this approach is tedious to calculate economic order quantity. So this approach is not
followed by many of the companies.
2) Graphical approach

Page 49
 5.1.1 Economic Order Quantity Curve

Total cost

Carrying cost

Relevent Cost

Ordering cost

Quantity per Order

The above picture represents the graphical approach of economic order quantity. The
economic order quantity occurs at the point Q where the total cost is minimum. Here the ordering
cost decreases with more number of orders. On the contrary the cost of carrying the inventory is
increasing with the increased number of orders. Thus the firms operating profit is maximized at
point Q. It may be noted that if the total cost do not change very significantly, the firm can change
EOQ within the range without any loss.
3) Formula approach

The simplest and accurate method to find EOQ is formula approach. This approach can be
derived as follows.

Page 50
Derivation of EOQ

Let the ordering cost per order O, is fixed. The total order cost will be number of orders
during the year multiplied by ordering cost per order. If A represent total annual requirements and
Q the order size, the number of order will be A/Q and total order cost will be:

Total ordering cost = (Annual requirement X Per order cost) / Order size

TOC = AO (2.1)
Q
Let us further assume that carrying cost per unit c, j instant. The total carrying cost

will be a product of the average inventory units and the carrying cost per unit. If Q is the

order size and usage is assumed to be steady, the average inventory will be:

Average inventory = order size = Q (2.2)

2 2
And total carrying costs will be:

Total carrying cost = average inventory X per unit carrying cost

TCC = QC (2.3)
2
The total inventory costs then, are the sum of total carrying and order costs:
Total cost = total carrying cost + total order cost
TC = QC + AO (2.4)
2 Q
Equation (2.4) reveals that for a large order quantity Q, the carrying cost will increase,

but the ordering costs will decrease. On the other hand, the carrying costs will be lower

and ordering cost will be higher with lower order quantity. Thus the total cost function

represents a trade – off between the carrying costs and ordering costs for determining the

economic order quantity.

To obtain the formula for economic order quantity, equation (2.4) is differentiated with
respect to Q and setting the derivative equal to zero.

EOQ = √2AO/C
Page 51
The formula may be derived from equation (2.4) as follows

TC = QC + AO (2.4)
2 Q
Differentiating equation (2.4) with respect to Q

dTC = c - AO (2.5)
dQ 2 Q^2
Setting equation (2.5) to 0
C __ AO = 0
2 Q^2
CQ^2 = 2AO
Q = √2AO/C
Note: the formula approach is tedious to calculate and the graphical approach is not possible for
each item of inventory. So, the easy way to determine EOQ is to use the order-formula approach.
Hence, IPPL’S EOQ is analyzed on the basis of formula method

EOQ – Uses

1) EOQ is useful to decide how many inventories should be added when inventory is
replenished.
2) It is useful in deciding lot sizes, which will reduce both ordering and carrying costs.
3) By using EOQ the optimum inventory level can be maintained, which will reduce the
investment in inventories.

ECONOMIC ORDER QUANTITY FOR CONSUMABLES

1) Name of the item – Bearing 30206 ZZ

Item code - 4939
Annual usage - 924 (A)
Ordering cost per unit - 20 (O)
Carrying cost - - (C)
Unit price - 31
Q = √2AO / C

= √2 X 924 X 20 / 31

EOQ = 34
Page 52
No of order per year = A/EOQ
= 924 /34 = 27
Total value per order = EOQ*Unit Price =
= 34 * 27 = 918
2) Name of the item – INDICATOR RED LMRD 12V DC
Item code - 16074
Annual usage - 888 (A)
Ordering cost per order - 20(O)
Carrying cost - -(C)
Unit price - 65
Q = √2AO / C
= √2 X 888 X 20 / 65
EOQ = 23
No of order per year = A/EOQ = 888/23 = 38
Total value per order = 1495
3) Name of the item – CHANNEL ALUMIUM
Item code - 172
Annual usage - 1224 (A)
Ordering cost per order – 150 (O)
Carrying cost - -(C)
Unit price - 410
Q = √2AO / C
= √2 X 1224 X 150 / 410
EOQ = 29
No of order per year = A/EOQ = 1224/29 = 42
Total value per order = 11890
4) Name of the item – HAND GRIP PLASTIC
Item code - 2143
Annual usage - 480 (A)
Ordering cost per order – 50 (O)
Carrying cost - -(C)
Unit price - 42
Q = √ 2AO / C

Page 53
= √2 X 480X50 / 42
EOQ = 33
No of order per year = A/EOQ = 480/33= 14
Total value per order = 1386
5) Name of the item – RING PLASTIC FOR ROUND PIPE
Item code - 2447
Annual usage - 816 (A)
Ordering cost per order – 20 (O)
Carrying cost - -(C)
Unit price - 26
Q = √2AO / C

= √2 X 816 X 20 / 26

EOQ = 35

No of order per year = 816/35= 23

Total value per order = EOQ*Unit Price

= 35*26= 910

5.1.1 ECONOMIC ORDER QUANTITY

Item Item Description Item EOQ No. of order Value of the

No. Code per year order

1 BEARING 30206 ZZ 4939 34 24 918

2 INDICATOR RED LMRD 16074 23 38 1495

12V DC
3 CHANNEL ALUMIUM 172 29 42 11890

4 HAND GRIP PLASTIC 2143 33 14 1386

5 RING PLASTIC FOR 2447 35 23 910

ROUND PIPE

Page 54
ANALYSIS & INTERPRETATION

In the above table the EOQ & the no. of orders purchased per year for various
components are calculated. The calculated EOQ is compared with the no. of units of each
component purchased in the organization. It is found that, there is a variation in the EOQ
& no. of unit purchased. It is understood that the company is not following EOQ for
purchasing the materials & therefore the inventory management is not satisfactory.ption Itc
5.2 SAFTY STOCK & REORDER LEVEL
MEANING
Safety stocks are the minimum additional inventory which serves as a safety
margin to meet an unanticipated increase in usage resulting from an unusually high
demand and an uncontrollable late receipt of incoming inventory.
Reorder level
Reorder level is that inventory level at which an order should be placed to replenish
the inventory. the term re-order point may be defined as same as above that level of
inventory when fresh order should be placed with the suppliers for producing additional
inventory equal to the EOQ. The re-order level would be established at appoint such that
the stock in hand would be just sufficient to meet the demand during the lead line. To
determine the re-order point with certainty we should know:

(a) Lead time

(b) Usage

(c) EOQ

Lead time analysis in inventory problems

The time between ordering a replenishment of an item and actually receiving the
item in to inventory is referred to as lead time. If lead time is zero then no need for placing
the order in advance. If the lead time exists and also demands known, then it is required to
place an order in advance by an amount of time equal to the lead time. If the lead time is
low, then a small stock is required. But if lead safety time is significant then the company

Page 55
will have to maintain higher safety stock level to avoid stock out. Thus the capital tied up
in inventory will be high.
Normally lead time will be shorter for local suppliers and greater in case of made to order
supply. it may be noted that lead time of imported of goods will be considerably high when
compared to local supply . Reason is that the material has to go several formalities so there
replenishment quantity should be planned by taken this variable lead time for imported
items. Average usage is the important used in reordering level. Average usage is
consumption of materials is utilization of the resource to its maximum extent during a
particular period say week, month, or year. Average consumption is arrived by dividing
consumption during a particular period into the period taken for study. Economic order
quantity is otherwise called as optimum order quantity. Economic order quantity is the one
for which the aggregate of the costs of ordering the inventory and the costs of carrying the
inventory is at minimum.
Reorder point under certainty and uncertainty
Reorder level may be certain or uncertain in certainty condition lead time usage
does not fluctuate. This situation can be explained by the following illustration.
ILLUSTRATION 1
Economic order quantity of an item is 600 units, the average usage is 60 units per
day
the lead time is 3 days.
Reorder point = lead time X average consumption / day
= 3 X 60 = 180 units

5.2.1 Reorder point under certainty

Page 56
 EOQ
600 units

Average

Inventory 300

Reorder point

180 units

1 2 3 4 5 6 7 8 9 10

Lead time

The above figure indicates when the firm should give order. i.e. The period of placing new
order . The new order should be placed at the end of seventh day, when there are 180 units
left to consume during the lead time. As soon as lead time ends and inventory level reaches
zero, the new stock of 600 units will arrive. Thus the reorder point is lead time X average
usage per day. That is 3 days X 60 units = 180 days
ILLUSTRATION 2
EOQ = 600 units
Lead time = 3 weeks
Average usage = 60 units per day
Safety stock = 30 units per day
This illustration explains the reorder level uncertainty. Under uncertainty situation the lead
time and usage is not same. Fluctuation may cause stock outs which will be costly to the
firm. So to meet the demand during fluctuation the safety stocks are maintained.
Reorder point = lead time X average consumption / day + safety stock

Page 57
= 3 X 60 + (30 X 3) = 270 units
5.2.2 Reorder point under uncertainty

Maximum inventory
Average usage
690

Average inventory 345

Reorder point 270

Maximum
Usage

Safety stock 90
1 2 3 4 5 6 7 8 9 10

Lead time

The above figure explains the firm should maintain a safety stock of 90 units. Thus the
reorder point will be 180 + 90 = 270 units. The maximum inventory will be equal to the
economic order quantity plus the safety stock. i.e. 600 + 90 = 690 units.
Safety stock
Safety stocks are maintained to minimize the effect of unascertained in demand on
lead time. The safety stock may be defined as the minimum additional inventory to secure
as a safety margin or cushion to meet on unanticipated increase in usage resulting from
various uncontrollable factors. In case of imported items the safety stock component of the
inventory is likely to be large.

Page 58
 5.2.3 Safety Stock

Inventory in hand

Stock out is avoided

Safety stock

0
Time

Determining the optimum level of safety stock

If the safety stock is maintained is inadequate the stock out will be frequently
faced. as against this if the safety stock maintained is high the cost would be high , hence it
is necessary to strike a balance between stock out costs and inventory costs to arrive at an
optimal safety stock.
Impact of non maintenance of safety stock level
If there is no safety stock, stock outs would arise. If safety stock is provided in an
unscientific way and the result is that some item are stocked excessively others continue to
face shortage.

Page 59
 ANALYSIS OF SAFETY STOCK AND REORDER LEVEL FOR RAW MATERIAL

5.2.1 STOCK OF RAW MATERIAL

S.NO. Item Name Item Monthly Lead time in

Code consumption days

1 WHEEL 77*32 SWIVEL 6822 52 30

TYPE CASTOR HAVY
DUTY

2 PANEL KBD FOR C- ARM 15017-1 68 45

LCD LOW

3 GRID CIRCULAR 9" 8:1 1437 76 30

103 L FD-32"-40" FO-90
CM

4 HANDLE FOR AL. C 3248 145 25

5 SMPS POWER SUPPLY 6946 30 30

nit

Safety stock = Monthly consumption X LT

30
LT = Lead time in days
A = Monthly consumption

Page 60
 5.2.2 Determining the safety stock for raw material

S.NO. Item Name Calculation Safety stock

1 WHEEL 77*32 SWIVEL 52/30 x 30 52

TYPE CASTOR HAVY
DUTY

2 PANEL KBD FOR C- ARM 68/30 x 45 102

LCD LOW

3 GRID CIRCULAR 9" 8:1 76/30 x 25 63

103 L FD-32"-40" FO-90 CM

4 HANDLE FOR AL. C 145/30 x 20 96

5 SMPS POWER SUPPLY 30/30 x 45 45

Inference
1) Heavy safety stock should be maintained in the case of Panel KBD for c-arm
2) 96 pieces of handle for AL. C should be maintained as safety stock
3) 45 number can be maintained as the safety stock for the SMPS power supply
Fixing reorder level for consumables
ROL = 1.5 * Safety stock
ROL = reorder level
LT = lead time

Page 61
 5.2.3 Reorder level for raw material

S.NO. Item Name Calculation ROL

1 WHEEL 77*32 SWIVEL 1.5 X 52 78

TYPE CASTOR HAVY
DUTY

2 PANEL KBD FOR C- ARM 1.5 X 102 153

LCD LOW

3 GRID CIRCULAR 9" 8:1 1.5 X 63 94

103 L FD-32"-40" FO-90 CM

4 HANDLE FOR AL. C 1.5 X 96 144

5 SMPS POWER SUPPLY 1.5 X 45 67

Inference

1) From the table it can be explained that the company should fix its reorder level as per
the calculated level
2) Item Panel KBD for C-ARM and Handle for AL. C needs close control with regards to
replenishing and its lead time is longer and quantity required is more per month
3) It can be understood clearly that the reorder quantity increase with the corresponding
increase in lead time.

5.3 ABC ANALYSIS

MEANING
The ABC system is a widely used classification technique to identify various items
of inventory for purposes of inventory control. On the basis of unit cost involved, the
various items are classified into 3 categories:

Page 62
 (1) A, consisting of items with the large investment,
(2) C, with relatively small investments but fairly large number of items and
(3) B, which stands mid-way between category A & C.

Category A needs the most rigorous control, C requires minimum attention and B deserves
less attention than A but more than C.
A CLASS (HIGH VALUE)
1 MEMORY XC-VAM-LAN [ 100 ] ( X-RAY CONTROLLER )

2 C ALUMINIUM FOR C-ARM

3 I.I. 9" TOSHIBA MODEL E-5764-SD

4 I.I. 9" THALES MODELTH-9403

5 FLAT PANEL PAXSCAN 4343R

6 X-RAY TUBE E-7239-X

7 MONITOR LCD 19" MONOCHROME

8 DIGITAL IMAGE PROCESSOR IQ +

9 C ALUMINIUM DIA 1220 MM

10 CAMERA CCD SONY B/W WITH CONNECTOR [XC-ES50CE ]

11 HORIZONTAL CARRIAGE COMPLETE ASSEMBLY [ 50 PCS SET ]

12 ACTUATOR

13 MONITOR LCD 19" MONOCHROME WITH METAL CASTING

14 CAMERA CCD WATEC B/W WITH CONNECTOR [WAT-902B]

15 LINEAR RAIL SYSTEM [ HARD CHROME PLATED ]

16 APRON LEAD DOUBLE SIDE SLEEVES MEDIUM [110*60CM ] WITH LONG

SLEEVES
17 SCREEN LEAD PROTECTION THREE PANEL WITH LEAD GLASS

18 SERVO STABILIZER 100 KVA 3 PHSAE WITHOUT COUPLER

Page 63
 B CLASS (MODERATE VALUE)

1 MONITOR LED 17" SQUARE ( BANQ ) MODEL : BL702A

2 SERVO STABILISER 2 KVA [ NEW MODEL ]

3 LBD GEARED FOR 300\500 \ HF X-RAY ASSEMBLED

4 C-CARRIAGE ASSEMBLY [ 6 PCS SET ]

5 APRON LEAD SINGLE SIDED LIGHT WEIGHT THICK 0.50 MM

6 LASER CROSS HAIR MODULE TYPE

7 CABLE H.V 6 MTR W/O SILICON WASHER

8 CABLE H.V 8 MTR [ LOCOFLEX-10405 ] XTRAFLEX

9 SCREEN LEAD PROTECTION SINGLE WITH WHEEL & GLASS WINDOW

SIZE 8"*10"
10 CARRIAGE FOR AL. C DIA 1220 MM [ 1 SET =6 PCS ]

11 PUMP MAGNETIC DRIVE[ MODEL:-PMP-30]

12 CARRIAGE HORIZONTAL ASSY.FOR ALLENEGRS C 65 [ 1 SET = 43 PCS. ]

13 ATTACHMENT ASSEMBLY [ EN-8 ] [4 PCS SET] WITH ZINC PLATING PARTS
14 COLUMN FC DOMESTIC / EXPORT WITHOUT VERTICAL CARRIAGE

Page 64
 CLASS (LOW VALUE)

1 RELAY RELAY 3 NO/NC 5 A 12 V DC [ 3CO-MCC-12D ]

2 RING HORZONTAL CARRIAGE

3 CLAMP 3 NUMBER L TYPE

4 BEARING 6000

5 BUSH ROUND PIPE

6 PANEL KBD

7 INDICATOR RED LDRD

8 CHANNEL ALUMINIUM

Table 5.3.1 ABC ANALYSIS

Categories Total No. Items in Classes Percentage

A 18 45

B 14 35

C 8 20

Total 40 100

Page 65
ANALYSIS & INTERPRETATION:

The above table shows the classification of various components as A, B & C

classes using ABC analysis techniques based on unit value. From the classification A
classes are those whose unit value is more than Rs.100 and constitutes 45% of total
components. B classes are those whose unit value is between Rs.25-100 constitutes 35% of
total components and C classes are those whose unit value is less than Rs.25 constitutes
30% of total components. It is good that the company maintains its inventories based on its
value using controlling techniques.

Chart 5.3.1 ABC Analysis

50

45

40

35

30

25
45
20
35
15

10 20

0
A B C

5.4 FSN ANALYSIS

MEANING
All the items in the inventory are not required at the same frequency. Some are required
regularly, some occasionally and some very rarely.

FSN classifies items into Fast moving, Slow moving and Non-moving.

Page 66
 FAST MOVING ITEMS

S.NO ITEMS DETAIL

1 MEMORY XC-VAM-LAN [ 100 ] ( X-RAY CONTROLLER )

2 SERVO STABILISER 2 KVA [ NEW MODEL ]

3 MOTOR 1/2 HP 1440 RPM 1 PHASE 4.1 A 230V NF 114

4 HOLDER FOR BEARING SS 202 NON MAG. 'C' CARRIAGE

5 SWITCH 1 P 12 W 24° WITH ADVANC CONTACT

6 SWITCH 6 P 4 WAY 30° [ A 27553 J2 ]

7 SWITCH MICRO MTCRS 26 D 15 A

8 BEARING 6202 ZZ

9 BEARING 6201 ZZ

10 HOLDER FOR BEARING 6202 ZZ

11 BEARING 6000 ZZ

12 FAN 80 MM 12 V DC [ 08A-12M/80-12N/KD-1208/

13 SWITCH EMERGENCY 01 NOS -RCB2-BS-54 ,2 NOS -RB2-BE-102 ( 3 PCS SET )

14 INDICATOR RED LMRD 12 V DC

15 LBD MANUAL ASSEMBLED FOR 60\100\300\500 WITH ALLITE BULB TYPE

16 DUST COVER FOR CONTROL C-ARM HF WHITE

17 SMPS 15 V 3.4 AMP

Page 67
 SLOW MOVING ITEMS

S.NO. MATERIAL DETAIL

1 SWITCH SPST ON/OFF/ON 6 AMP [ MODEL : TS 603 ]

2 WIRE PVC 6 SQ. MM BLACK [ 1 ROLL = 100 MTR ]

3 SNAP CLOUSER 1/2" [ KP-194A ] ( PKT OF 100 NOS )

4 APRON LEAD KIRAN 100*60 CM ( 0.35 MM PB )

5 CBM PULLY ROD P2

6 COPPER WIRE ENAMELED 22 SWG

7 LED 10 MM ROUND RED

8 LOCKING PINS MODEL NO CR-MSTB

9 M.C.B. 63 AMP 3 POLE 415 V "C" CURVE 10 KA (L&T MODEL:-BB30630C)

10 SPRIAL WRAPING TUBE 1/8" [ KP-165A ]

11 PLATE M.S FOR INSPECTION WINDO DOUBLE TANK

12 RELAY 2 NO/NC 5 A 12 VDC [G2R-2] PCB MOUNTED [ STD PKG = 100 NOS ]

13 SHEET FIBER 1 MM BROWN COLOUR

14 TANK S.S 9 LTR WITH LIDS S.S.

15 COVER FOR POWER SUPPLY TOSHIBA P7 I.I 9"

16 PIN FOR CASSETTE LOCK

17 BEARING 6205 ZZ

18 CONNECTOR 7 PIN FRA-MSTB 2.5/7-ST-5.08 [1757064 ]

19 DIODE IN 4148 (PKG:DO-35)

20 PLUG RCA MALE CONNECTOR S.D [ C.P ] [ MODEL- MX 157 ]

21 RES 10 K 1/4 W 1% MFR

22 STICKER [ 4 PCS SET ] FOR SBM HF 6 KW/6R

23 CIRCLIP E-TYPE 4 MM S.S

Page 68
 Table 5.4.1 FSN ANALYSIS

Categories Total No. items in Classes Percentage

F 17 43

S 23 57

N 0 0

Total 40 100

ANALYSIS & INTERPRETATION:

In the above table shows the classification of various components as FSN items
using FSN analysis techniques based on movements. From the classification F items are
those which moves fastly and constitutes 43% of total components. S items are those
which moves slowly constitutes 57% of total components and N items are those which
doesn’t move (Non-moving items). According to data given, there is no Non-moving
items. It is not good as the company maintains low percentage in moving items.

Page 69
 Chart 5.4.1 FSN Analysis

60

50

40

30

20

10

0
F S N

Page 70
 5.5 TREND ANALYSIS
MEANING
Regression means dependence and involves estimating the values of a dependent
variable Y, from an independent variable X.
Y = a + bx
__
Where a= y – b x; b = Σxy – n x y
Σx2- nx 2

Table 5.5.1 CALCULATION OF INVENTORY TREND

YEAR Inventories (Rs.) X

(X) Y X=x-2012 X2 XY (RS)

2010 123856590 -2 4 -407713180

2011 172683828 -1 1 -252683828

2012 327573631 0 0 0

2013 385817539 1 1 585817539

2014 368161111 2 4 1076322222

Total( Σ ) 1378092699 0 10 1061742753

x = Σx/n = 0/5 = 0

y = Σy/n = 1378092699/5 = 275618539.8

b = Σxy – n x y = 1061742753- 5 * 0 * 1378092699 =106174275.3

Σx2- nx 2 10-5*0

Page 71
 a = y – b x = 275618539.8 – 1066174275.3 * 0 = 275618539.8
y = a + bx
= 275618539.8 + 106174275.3 x
The forecast of inventory for the year 2015 is computed by substituting x = 2015 in the
above equation.
= 275618539.8 + 106174275.3 x
= 275618539.8+ 106174275.3 (x-2012)
= 275618539.8+ 106174275.3 (2015-2012)
= 275618539.8+ 106174275.3 (3)
= 275618539.8+318522825.9
= 594141365.7

Therefore inventory for the year 2015 will be approximately Rs.594141365.7

Table 5.5.2 INVENTORIES PERCENTAGE

Years Inventories Percentage

2010 12,38,56,590 6.28

2011 17,26,83,828 8.76

2012 32,75,73,631 16.6

2013 38,58,17,539 19.56

2014 36,81,61,111 18.67

2015 59,41,41,365.7 30.13

TOTAL 1,97,22,34,064.7 100

ANALYSIS & INTERPRETATION:

In the above table shows the percentage of inventories increases from 6.28 to 18.67
in the year 2010-2014, the inventory for the year 2015 is expected to be 30.13 which is
again in the increasing trend. This infers that the inventory requirement is increasing in the
future period also. It shows satisfactory position of inventories as it implies increasing
production & demand for the product.

Page 72
 Chart 5.5.2 Trend of Inventory

25

20

15

10

0
2010 2011 2012 2013 2014 2015

5.6 INVENTORIES TURNOVER RATIO

MEANING
This ratio is calculated to consider the adequacy of the quantum of capital and its
justification for investing in inventory. A firm must have reasonable stock in comparison
to sales. It is the ratio of net sales and the average inventory. This ratio helps the financial
manager to evaluate inventory policy. This ratio reveals the number of times finished stock
is turned over during a given a accounting period.

Page 73
 The formula for the ratio is Net sales
Avg. Inventory
Table 5.6.1 Inventories Turnover Ratio

Net Sales Avg. Inventory Ratio

Year (Rs.) (Rs.)

2010 16,25,50,895 11,45,26,872 1.41

2011 32,65,85,284 17,95,28,545 1.81

2012 29,12,15,361 26,54,24,872 1.09

2013 1,12,74,52,617 39,12,61,765 2.88

2014 1,58,51,80,656 36,72,82,972 4.31

ANALYSIS & INTERPRETATION

In the above table shows inventory turnover ratio for the past years. The ratio is showing
increasing trend from1.41 to 4.31 in the year 2010 to 2014, except in the year 2012 which shows
only 1.09 times.

Page 74
 CHAPTER-VI

6.1 FINDINGS OF THE STUDY

1) Company is incurring more expenditure on inventory because of holding high level

of stock.
2) Working capital blocked in the inventory for 137 days which is not a healthy sign
for an organization.
3) Safety stock for end grinding belt should be maintained at high level.
4) Sophisticated inventory control techniques are not followed by the company.
5) The company is giving part of its raw material to sub-contractors for conversion.
6) Existence of communication gap among various functional departments.
7) More than 70% of the work was done by sub-contractors.
8) Lead time for import tools having long lead time. So the proper safety stock should
be maintained.
9) Centralized warehouse for the materials may be established.

6.2 SUGGESTIONS AND RECOMMENDATIONS

1) It may suggest that proper reorder level for consumables and cutting tools may be
maintained so that, the company can prevents the over stock or stock out level.

2) As it was understood from the study that the company maintaining safety stock
which

is not adequate to certain materials. So to avoid stock out the safety stock may be

maintained at optimum level.

3) To reduce the inventory cost such as carrying cost, ordering cost it is suggested that

the company can apply EOQ model to all the materials, consumables and tools to
the extent possible.

Page 75
4) In global competition, the company may follow the new technique like just in time
(JIT) by adopting flexible manufacturing system (FMS) to control inventories
efficiently in future.
5) The reorder level should be placed at the right time, based on the raw material
availability in the store.
6) In order to reduce the expenditure and to maintain inventories at optimum level, it is
necessary to implement proper planning, budgeting and coordination among all functional
departments.
7) The review can be made to all the material available in the store to avoid the unnecessary
dumping of materials, so the company can save the storage cost and space.
8) The production department may introduce the new technique called “vendor quality
management” to ensure the standardized quality in the finished product. The concept is
adopted in all leading companies.
9) To reduce the lead time and to save ordering cost it may be suggested to localize certain
important items instead of importing from other country. This will give a chance for
increasing employment opportunities to our people.
10) To control the job work items, it is suggested to convert such item as bought out items in
future

Page 76
6.3 CONCLUSION

A better inventory management will surely be helpful in solving the problems the
company is facing with respect to inventory and will pave way for reducing the huge
investment or blocking of money in inventory. From the analysis we can conclude that the
Company can follow the Economic Order Quantity (EOQ) for optimum purchase and it
can maintain safety stock for its components in order to avoid stock-out conditions & help
in continuous production flow. This would reduce the cost and enhance the profit. Also
there should be tight control exercised on stock levels based on ABC analysis & maintain
high percentage in fast moving items in inventories as per on FSN analysis for efficient
running of the inventory. Since the inventory Turnover ratio shows the increasing trend,
there will be more demand for the products in the future periods. If they could properly
implement and follow the norms and techniques of inventory management, they can
enhance the profit with minimum cost.

Page 77
 CHAPTER-VII

7.1 LIMITATIONS OF THE STUDY

 The entire analysis applies only to Whirlpool India Ltd, Puducherry.
 The study takes into account only the quantitative data and the qualitative aspects were
not taken into account.
 The assumption made in the EOQ and Safety stock formulas restrict the use of the
formula. In practice, unit cost, lead time, requirements of inventory items are not
accurately predictable. Rate of consumption varies in many cases. As such application
of the formula often becomes a difficult and complicated matter.
 ABC analysis is not one time exercise and items are to be reviewed and recategorised
periodically.

7.2 SCOPE FOR THE FURTHER STUDY

 To give plan to the company what to order, when to order and how much to order.
 It is useful for deciding operating policy & volume of inventory.
 It helps to develop the policies for the executives in inventory.
 It helps the company what items goods are categorized.
 Project helps to deal with forecasting in inventory.

Page 78
 BIBLIOGRAPHY

 REFERENCES BOOKS
 M Y Khan P K Jain “Financial Management” 4th edition Tata McGraw Hill.
 R.S.N. Pillai V. Bagavathi “Management Accounting” S Chand & Co.
 Martand Telsang “Industrial Engineering & Production Management” S Chand &
Co.
 B.M. Lall Nigam I.C. Jain “Cost Accounting” Prentice hall Of India Private Ltd.
 S.P. Iyengar “Cost & Management Accounting” Sultan Chand & Sons.
 WEB SITES
 www.inventorymanagementreview.org/2005/06/safety_stock
 www.inventorymanagementreview.org/inventory_basics/index
 www.inventorymanagementreview.org/justintime/index
 www.inventorymanagementreview.org/inventory_control/index

Page 79