ASTUDYONINVENTORYMANAGEMENT

IN
SUJANAMETALPRODUCTSLIMITED
AProjectreportsubmittedtoJawaharlalNehruTechnologicalUniversity,Hyderabad,
inpartialfulfillmentoftherequirementsfortheawardofthedegreeof
MASTEROFBUSINESSADMINISTRATION

By
K.V.SUNITHA
Reg.No.10241E0045
UndertheGuidanceof
K.SURYANARAYANA
AssociateProfessor

DepartmentofManagementStudies
GokarajuRangarajuInstituteofEngineering&Technology
(AffiliatedtoJawaharlalTechnologicalUniversity,Hyderabad)
Hyderabad
20102012

CERTIFICATE
ThisistocertifythattheprojectentitledASTUDYONINVENTORYMANAGEMENT

hasbeensubmittedbyMs.K.V.SUNITHA(Reg.No.10241E0045)inpartialfulfillmentofthe
requirementsfortheawardofMasterofBusinessAdministrationfromJawaharlalNehru
TechnologicalUniversity,Hyderabad.Theresultembodiedintheprojecthasnotbeensubmittedto
anyotherUniversityorInstitutionfortheawardofanyDegreeorDiploma.

Internalguide

HeadofDepartment

K.SURYANARAYANA
K.V.S.RAJU
AssociateProfessor
Professor&HOD
DepartmentofManagementStudies
DepartmentofManagementStudies
GRIET GRIET
S.RAVINDRACHAR
ProjectCoordinator
AssociateProfessor
DepartmentofManagementStudies
GRIET

DECLARATION

IherebydeclarethattheprojectentitledAstudyonInventorymanagementatSujana
metalproductsLtdsubmittedinpartialfulfillmentoftherequirementsforawardofthedegree
ofMBAatGokarajuRangarajuInstituteofEngineeringandTechnology,affiliatedtoJawaharlal
NehruTechnologicalUniversity,Hyderabad,isanauthenticworkandhasnotbeensubmittedto
anyotherUniversity/Instituteforawardofanydegree/diploma.

KVSUNITHA
(10241E0045)
MBA,GRIET
HYDERABAD

ACKNOWLEDGEMENT

FirstlyIwouldliketoexpressourimmensegratitudetowardsourinstitutionGokaraju
RangarajuInstituteofEngineering&Technology,whichcreatedagreatplatformtoattain
profoundtechnicalskillsinthefieldofMBA,therebyfulfillingourmostcherishedgoal.
IwouldthankallthefinancedepartmentofSUJANAMETALPRODUCTSLTDMr.
SatishkommineniDeputyManager(finance&accounts),andtheemployeesinthefinance
departmentforguidingandhelpingmeinsuccessfulcompletionoftheproject
IsincerelyexpressmygratitudetotheprincipalDr.J.N.MURTHYandforhis

inspirationandtimelysupportinsuccessfulcompletionofmyprojectwork.

IamverymuchthankfultoourK.Suryanarayana(InternalGuide)forextendinghis
guidanceandcooperationindoingthisproject.

IamalsothankfultoourprojectcoordinatorMr.S.RavindraCharyforextendinghis
cooperationincompletionofProject.
Iconveymythankstomybeloved parents,friendsandmyfaculty whohelpedme
directlyorindirectlyinbringingthisprojectsuccessfully.

INDEX
S.NO

CONTENTS
CHAPTER1

K.V.SUNITHA
(10241E0045)

PAGENO

1.1
1.2
1.3
1.4
1.5
1.6

Introductiontothestudy
Needforthestudy
Objectivesofthestudy
Scopeofthestudy
Limitationsofthestudy
Researchmethodology

1
3
4
5
6
7

CHAPTER2
2.1
2.2

Industryprofile
Companyprofile

8
19

CHAPTER3
3.1

Theoreticalframeworkandarticle

27&48

CHAPTER4
4.1

Dataanalysisandinterpretation

51

CHAPTER5
5.1
5.2

Findingsandsuggestions
Conclusion
BIBLIOGRAPHY

74
75

CHAPTER1
INTRODUCTION

INTRODUCTION
FinancialManagementisconcernedwiththedutiesofthefinicalmanagerinthebusiness
firm.Financialmanagersactivelymanagethefinancialaffairsofanytypeofbusiness,namely
financialandnonfinancial,privateandpublic,largeandsmall,profitseekingandnonprofit.
Theyperformsuchvariedtask,asbudgeting,financialforecasting,cashmanagement,
creditadministration,investmentanalysis,fundsmanagementandinventorymanagement.

Aterminventoryreferstothestockfileoftheproductsafirmisofferingforsaleandthe
componentsthatmakeuptheproduct.Inotherwords,inventoryiscomposedofassetsthatwill
beshowedinfutureinthenormalcourseofthebusinessoperations.Theassetswhichfirms
storeasinventoryinanticipationofneedare:
Rawmaterials
Work in process (Semi Finished
goods)Finishedgoods
Therawmaterialinventorycontainsitemthatarepurchasedbythefirmfromotherand
areconvertedintofinishedgoodsthroughthemanufacturing(production)process.Theyare
animportantinputofthefinalproduct.Theworkingprocessinventoryconsistsofitems
currentlybeingusedintheproductionprocess.
Theyarenormallysemifinishedgoodsthatareatvariousstagesofproductioninamulti
stageproductionprocess.Afinishedgoodsrepresentedfinalorcompletedproductswhichare
availableforsale.Theinventoryofsuchgoodsconsistsofitemsthathavebeenproducedbut
areyetbesold.
Inventory,asacurrentasset,differsfromothercurrentassetsbecauseonlyfinancial
managersarenotinvolved.Ratherallthefunctionalareas,finance,marketing,production,
andpurchasingareinvolved.Theviewsconcerningtheappropriatelevelofinventorywould
differamongthedifferentfunctionalareas.
Thejobofthefinancialmangeristoreconciletheconflictingviewpointsofthevarious
functionalareasregardingthemaximizingtheownerswealth.Thus,inventorymanagement,
likethemanagementofothercurrentassets,shouldberelatedtotheoverallobjectiveofthe
firm.Itisinthiscontextthatthepresentchapterisdevotedtothemainelementsofinventory
managementfromtheviewpointoffinancialmanagement.
Theobjectiveofinventorymanagementisexplainedinsomedetailsections.Sectiontwo
isconcernedwithinventorymanagementtechniques.Attentionisgivenheretobasicconcepts
relevanttothemanagementandcontrolofinventory.

Theaspectscoveredare:
Determination of the type of control
required.Thebasiceconomicorderquantity
The reorder point,
andSafetystocks.
Asamatteroffact,theinventorymanagementtechniquesareapartofproduction
management.Butafamiliaritywiththemisofgreathelptothefinancialmanagersin
planningandbudgetinginventory.

NEEDTOHOLDINVENTORIES
Martinandmilleridentifiedthreegeneralmotivesforholdinginventories

TRANSACTION

MOTIVE:

Thisreferstotheneedofmaintaininginventorytofacilitatesmoothproductionandsales
operations.

PRECAUTIONARY

MOTIVE:

Precautionarymotiveforholdinginventoryistoprovideasafeguardwhenthenactuallevel
ofactivityisdifferthananticipated.Thisinventoryserveswhenthereisaunpredictablechanges
inthedemandandsupplyforces.

SPECULATIVE

MOTIVE:

Thismotiveinfluencesthedecisiontoincreaseordecreasethelevelsofinventorytotake
theadvantageofpricefluctuations.

OBJECTIVEOFTHESTUDY
Tostudyabouttheorderinglevelsfortheimportantcomponentsofinventory.
Tounderstandandmeasureeconomicorderquantityfortheselectedrawmaterialitems.
ToanalyzeitsinventorymanagementmethodswiththehelpofABCanalysis,VED
analysisetc.
ToevaluatetheinventorymanagementpracticesofSUJANAMETALPRODUCTS
LIMITED.
Tooffersuitablesuggestionsfortheimprovementofinventorymanagementpractices.

SCOPEOFTHESTUDY

Inventorymanagementisasimpleconceptdonthavetoomuchstockanddonthavetoo
little.Sincetherecanbeasubstantialcostsinvolvedinstayingaboveandbelowtheoptimal
range,carefulinventorymanagementcanmakeahugedifferenceintherightbalancecanbe
quiteacomplexandtimeconsumingtaskwithouttherighttechnology.
InventorymanagementisveryimportantforSUJANAMETALPRODUCTSLTD.It
enablesthebusinesstomeetorexceedexpectationsofthecustomersbymakingtheproducts
readilyavailable/
ThescopeofthestudyincludestheABCAnalysisofRawMaterials,workinprogress
andfinishedgoodsforfourfinancialyears.
Thisstudyprovidesinsighttothemanagementofhighvalueitemsandalsobrings
attentionofmanagementtowardsmovementofAclassitemsoverperiodof4years

LIMITATIONSOFTHESTUDY

Detailstudyaboutallthematerialwasnotpossiblebecauseoftimelimit.
Someoftheinformationwaskeptconfidentialbythestoriesdepartment.
Studywasconfinedonlytotheselectedcomponentsinthestoresdepartment.

RESEARCHMETHODOLOGY

Thedatahasbeengatheredthroughinteractionanddiscussionswiththeexecutives
workinginthedivision.
Someimportantinformationhasbeengatheredthroughcoupleofunstructuredinterviews
ofexecutive.
Annualreportsandothermagazinespublishedbythecompanyareusedforcollecting
therequiredinformation.

CHAPTERII
INDUSTRYPROFILE
COMPANYPROFILE

INDUSTRYPROFILE

Steelisversatileandindispensableitem.Ironandsteelcomprisesoneofthemost
importantinputsinallsourcesofeconomy.Thisindustryisbothabasicandacoreindustry.
Theeconomyofanynationdependsonastrongironandsteelindustryinthatnationhistory
hasshownthatcountrieshavingastrongpotentialityforironsteelproductshaveplayeda
predominantroleintheadvancementofcivilizationintheworld.Thegreatinvestmentthathas
goneintothefundamentalresearchinironandsteelindustryhashelpedbothdirectlyand
indirectlymanymodernfieldsoftodaysscienceandtechnology.
Therapidgrowthanddevelopmentofsteelcapacityisindeedalogicalcorollaryofany
programofrapidindustrialization.Steelformsthebackboneoftheeconomy,especiallyof
anyindustrialcountry.Ithasbackwardandforwardlinkages,whichmakessteel
indispensible.Thevitalrole,whichsteelindustryplayinthegrowthanddevelopmentof
nationseconomy,isundeniable.
Theimportantofsteelineconomicactivitiescannotbeoveremphasized.Besides,steel
provideslargeemploymentdirectlyanditacknowledgementthatforeverydirectsteel
employee,15thousandopportunitiesareindirectlyinthelinkageindustries.
Steel,acoresectorindustry,emergedasthebackboneforindustrializationinmostof
the countries. The index for steel production and for capita consumption of steel in a
countryhasbecomingmeasuringscalesofeconomicgrowthandreconstructionofanation.
Steeloccupiesstrategiespositionin5effortstoattainasolidandselfreliantindustrybase.In
spiteoftheironandsteelindustrybeingacapital,laborenergyintensiveindustry,subjectedto
rapid,uppredationstheastonishingfactisthat,85%ofthemetalsproducedintheworld,is
accountedbysteelalone.Hence,steelisidentifiedasaninternationalindustry,withglobalfocus
onsteelmakingandsteeltechnologies,emphasizingquality,production,andcostreductions.

FUTUREDEMAND
Indiansteelindustryplaysasignificantroleinthecountryseconomicgrowth.Themajor
contributiondirectstheattentionthatsteelishavingastrongholdinthetraditionalsectors,such
asinfrastructure&construction,automobile,transportation,industrialapplicationsetc.
moreover,steelvariantstainlesssteelisfindinginnovativeapplicationsduetoitscorrosion
resistiveproperty.Indianisthefifthlargeststeelproducerattheglobalfrontandstrugglingto
becomethesecondproducerinthecomingyears.
Indiansteelindustryoutlookto2012isanoutcomeofanextensiveresearchand
conceptualanalysisoftheIndiansteelindustry.Thereportprovidesdetailinformationonsteel
industryinIndia.Thereportalsopresentsaninsightintothefutureoutlookofvariousvertical
industrysegments,includingautomotive,aerospace,margin,consumerdurables,power,railways,
telecom,andhousing.Thereportclassifiesthefinishedsteelproductmarketintotwocategories
AlloyandNonAlloy.Thereportalsocoversinformationonindustrywisesteeldemand,overall

Steelconsumption,production,andtradingmarket.Besides,itprovidesindustryforecastfor
differmarketsegment.
Steel authority of India(SAIL)LTD has planned to enhance its hot metal production
capacityfromthelevelof13.82milliontonsperannum(MTPA)to23.46MTPAunderits
currentphaseofexpansionandmodernizationtobewhichisexpectedtobecompletedby
financialyear20122013.
SAILwouldincreaseitscapacityfurtherto26.18MTPA.Theindicativeinvestmentfor
currentphaseisaboutUS$13.28billion.Additionally,approximatelyUS$2.21billionhasbeen
earmarkedformodernizationandexpansionofsailmines.
ThesteelconsumptioninthecountrywillsurgeataCAGRofaround7%duringFY2012
2014.

PRESENTDEMANDININDIA:
Indiasannualsteeldemandisseenrisingby10percentinthefiscalyeartomarch
2011,helpedbyhigherspendingoninfrastructure.
Indiasbudgetfor2010/11,whichwasannouncedbyfinanceMinisterPranabmukherjee
proposedtoinvest1.73trillionrupeesoninfrastructure,ameasurecheeredbythesteel
industry.
Steelproductioninthe2010/11(AprilMarch)fiscalyearislikelytobe65milliontons,
comparedto6061milliontonsofinthecurrentyear.
Indiahasconsumed63.55milliontonsofsteelin200910comparedto58.28milliontons
inthepreviousyear.
Withnearly80milliontonsperannuminstalledcapacity,Indiaiscurrentlytheworlds
fifthlargestproducerofcrudesteel.

PASTDEMANDININDIA:
Moreover,theperformanceoftheindustrylargelydependsonthecountryseconomic
growth,andthestablegovernmentatthecentrewillgivemoreemphasistothe
infrastructuredevelopment.Programsannouncedbythegovernmentearlierwillbe
accelerated.Also,thegrowthinautomobilesectorwillspurthesteeldemand.
ThesteeldemandsignificantlyslumpedduringthethirdquarterofFY200809ending
December2008,havingseenthreeyearsofaverage15%20%growth.However,the
fourthquarterwhichendedMarch31,2009postedanincreaseof3.8%comparedtothe
correspondingquarterpreviousyeari.e.thequarterendingMarch31,2008.
Thejointplantcommittee,adatadisseminationbodyunderthecentralMinistryofsteel,
hasrecentlyreleasedthesteelindustrysstatisticsshowingthatthesteelproductionstood
at56.4millionMetricTonsintheyearendedMarch2009againsttherevisedoutputof
56.1millionMetrictonsinFY200708.

CHAIRMAN&BOARDOFDIRECTOR

MANAGINGDIRECTOR

MARKETINGHUMAN
RESOURCE

Works
CORPORATE
SECRETERIAL
FINANCE

________________________________________________

MATERIAL
REROLING
TOWERS
ACCOUNTS&HUMAN
1

MATERIAL
MATERIAL
MANGEMENT
MANAGEMENT

ACCOUNT&
ACCOUNT&
HUMANRESOURCE
HUMANRESOURCE

10

GLOBALSTEELSCENARIO:
Itisinterestingtonotethattheworldstotalcrudesteelproductiongrewatamuchslower
rateduringthefirsthalfofthecenturyandthegrowthratepickedupatasignificancerateafter
IIWorldWar,withameagerproductionlevelof28.3MTin1900,theproductioncrossedthe
firsthundredmarkin1927(101.8MT).Theproductionin1943was159.6MTandthenit
sharplyfellto111.6MTin1946.Thenthegrowth529.8MTin1968,650.7MTin1972,703.8
MTin1974andthehighesteverproductionof764.4MTin1979.Duringthe70sitwitnessed
oneofthemostsevereeconomiccrisisonaccountofpetroleumoil.Thishadapronounced
impactonoveralleconomyoftheworldandparticularlysteelindustry.Theworldproductionof
steelstarteddecliningto644.4MTin1982.Theproductionimprovedto683.7MTin1983,
710.2MTin1984,719.1MTin1985,and714.2MTin1986.

Amongthetopsteelproducingcountriesoftheworld,theUSAmaintainedthepositionas
thebiggeststeelproduceruntil70s,whentheErstwhileUSSRtakenovertheUSAandhas
remained onthe top of the world since then. Inthe processJapan also developed its steel
IndustrysignificantlyandtookovertheUSAtobecomethefirstbiggestproducerintheworld.

11

GLOBALPERPECTIVEINSTEEL:
WorldDemand:
Totaldemandforsteelintheworldisexpectedtogrowatanannualrateof1.7%between1935
and2000accordingtoastudybychaseeconometrics.Accordingtothisestimate,totaldemandin
theyear2000isexpectedtobe913MTofcrudesteel.Theworldgrowthrateof1.7%perannum
disguises dramatic differences in steel demand growth. Within the nonsocialistic world, steel
demandinadvanceindustrialcountriesatawholeareexpectedtogrowat0.6%annualrate
followinga2.2%annualratebetween1974and1984.Steeldemandinlessdevelopedcountriesas
awholeisexpectedtogrowata5.5%annualrateupto2000followinga3.1%annualgrowthrate
between1974and1984.Withinthecentrallyplannedeconomiescategory,theEasternEurope
erstwhileUSSRregionmayhavea0.3%annualsteeldemandgrowthduringtheperiod197484.
SteelDemandrateuptotheendofthiscenturyaftera7.8%perannumgrowthduring197484.

THEINDIANSTEELSCENARIO:
SteelconsumptioninIndiahasgoneupduringthepastdecadefromthelevelof10MT
(199394).Similarlypigironconsumptionhasgoneupfrom1.4MTtoabout1.8MT.Thepast
decadewasnotsignificantonlyforhighergrowthrateofironandsteelconsumptionhasgone
upfrom1.4MTtoabout1.8MT.Thepastdecadewasnotsignificantonlyforhighergrowth
rateofironandsteelconsumptioninthecountrycomparedtopreviousfewdecades(during
196061steelconsumptioninthecountyhasgoneupfrom3.6MTto8.9MTonly),butsome
vitaleventshavealsotakenplacewhichbroughtanoverallchangeintheIndianSteelScenario.
Duringthe80sdecade,allmainsteelproducershavetakenanumberofstepstomodernize
thetechnologyandproductsoftheirsteelplants.Anumberofmajorsecondaryproductshave
entered in the integrated steel production activities in a big way. Some of them have also
enteredintosophisticatedproductionareaofhigherqualitycoldrolledsheetsandcoatedsheets.
TherecentpolicyofthegovernmentofIndiaforliberalizingtheIndianironandsteelsector
from ageold control and equalized freight system has changed the basis structure of the
industry

12

Thoroughly.ThepolicyofliberalizedimporthasalsoputtheIndiansteelindustryopento
globalcompetition.

DEVELOPMENTOFSTEELINDUSTRYININDIA:
ThedevelopmentofsteelindustryinIndiashouldbeviewedinconjunctionwiththetype
and system of government that had been ruling the country. The production of steel in
significantquantitystartedafter1900.Thegrowthofsteelindustrycanbeconvenientlystudied
bydividingtheperiodintopreandpostindependenceera(orbefore1950andafter1950).The
totalinstalledcapacityduringthepreIndependenceerawas1.5MT/year,whichhasrisento
about9MTofingotbythe70s.Thisistheresultoftheboldstepstakenbythegovernmentto
developthesector.

GROWTHINCHRONOLOGICALTERMS:
1 1830:JoshiaMarshallHealthConstructedtheFirst
ManufacturingPorto.NovainMadrasPresidency.Howeveritwasafinancialfailure.

2 1874:JamesErskinefoundedtheBengalIronWorks.
3 1899:JamshedjiTatainitiatedtheschemeforintegratedsteelplant.
4 1906:FormationofTISCO.
1911

: TISCOstartedproduction.

1918

: TISCOstartedproduction.

1 194050:FormationofMysoreIronSteelLtd.,atBhadravathiinKarnataka.

13

SWOTANALYSISOFINDIANSTEELINDUSTRY:
STRENGTHS:

1 Indiahasbeenbestowedwithhighreservesofbasicrawmaterialsforsteelmaking.The
countryhasabout12BTofironore;25BTofcookingcoal;11.6BTofmanganeseore;
9.75MToffluxgradeslimestoneand1.7BTofdolomite.Excepthighashcontentincoal,
allmineralsareofmostsuitablequalityandhencethenIndiahasbeencomfortablyplaced
whencomparedtoanyothercountryintheworld

2 India has large number of qualified and experienced metallurgists, engineers and
technicians,whocanengineer,adoptandassimilatecosteffectivetechnologiesformaking
andshapingofsteel

3 Maintaininganedgeincostandqualitycompetitivenessintheexportmarkets,lowlabor
cost(15%ofthesteel)andwelltrainedhumanresourceaswellasgoodqualityinputs,is
oneofthemajorstrengthsoftheIndianSteelIndustry.

WEAKNESSES:

1 Highcapital,laborandenergyintensive.Industryestablishmentinvolveslonggestation
period.
2 Slowgrowthrateindomesticaswellasinternationaldemand..
3 Totaldependenceofscrap,resultinginhugscrapimportsfurtheruptrendinscrappricesto
reduceprofitability
4 Poor capacity utilization of steel units due to inadequate infrastructure facilities and
inadequateshorttermandlongtermplanning
5 Highandrisingpowercostsandlowavailabilityofpowerarebecomingaburdentosteel
industry

14

OPPORTUNITIES:

1 PercapitaconsumptionofsteelinIndiaislessthan30kg,whichislessthanonefifthofthe
worldaverage,thismeanshugepotentialforsteelconsumptionaswellaslatentdemand.
2 Presentlythesectorisalmostentirelyopenwithnolicensing,pricingdistributionandimport
control.Therearenorestrictiononcapacities
3 Thegovernmenthasmadechangesintheindustrialpolicy.Steelproductionwhichhasearlier
restrictedforpublicsectoralso.Furthertherearenorestrictionsoncapacities.
4 HugeexportpotentialtoSouthEastAsianCountries,Gulfandneighboringcountriesexistbeing
costandqualitycompetitive
THREATS:

5 Worldsteelindustryisploughedbyrecessionduetothefollowingreason:maturedmarketsfor
usedindustrieslikeautomobiles,appliance,andcontinuousefforttocutcosts,capacities,jobs
andstrivingformorecorporateexports.

6 Severe threat of technical obsolesces due to rapid development in secondary steel making
technologies,existsinIndiansteelindustry.
7 Diseconomies ofscale of operation by various mini steel plants and inadequate investment
opportunitiesformodernizationandupgradationduetohighcostofinflationandrisinginterest
andfinancingrateposingamajorthreattotheindustryasawhole.

15

TYPESOFSTEELPLANTSININDIA:
Themajortypesofsteelplants:

1. IntegratedSteelPlants.
2. MiniSteelPlants.
3. RerollingSteelPlants.
4. Alloy&SpecialSteelPlants.

INTEGRATEDSTEELPLANT:
ThecharacteristicsofIntegratedSteelPlantareasfollows:

1 Havelargeinstalledcapacities.
2 Arehighlycapitalintensive.
3 Arelaborsintensive?
4 Have all facilities including raw material resources, water supply. Township
facilitiesetc.,allunderoneadministrativecontrol.
5 All operations (from procurement of raw materials and processing to finished
products)underadministrativecontrol.
6 Independentofprocessingunits.
7 Sourceofearningforeignexchange.
8 Integrated Steel Plants in India are the one set at Rourkela, Bhilai, Durgapur,
Bokaro,andIISCOandTISCOandVSP.

16

PRODUCTSFROMINTEGRATEDSTEELPLANTS:
Flat Products (Sheets, Plates
etc.,).StructuralProducts.
WirerodProducts.
Blooms,billetsandslabs.
Railway track materials (rails, sleeper,
bars).Pigiron.

2. MINISTEELPLANTS:
ThecharacteristicsofMiniSteelPlantsareasfollows:

1 Lowgestation,lowinvestmentcost,lowBEP.
2 Effectiveinstallationandutilizationofelectricarefurnaceandcontinuouscasting
units
3 Canbesetupatmarketcentersornearrawmaterialresources
4 Environmentalpollutioninnegligible
3. REROLLINGSTEELPLANTS:
ThecharacteristicsofRerollingSteelPlantsareasfollows

1 Smallinstalledcapacities.
2 Needspecialtypesofplants&equipmentlikehighfrequencyinductionfurnace,
meltingunitsetc.,
3 Theyneedspecialtypeoftechnologyateverystage.
E.g.:melting,rolling,finishingetc.,

17

4.ALLOY&SPECIALSTEELPLANTS:
ThecharacteristicsofAlloy&SpecialSteelPlantsareasfollows

1 Smallinstalledcapacities.
2 Needspecialtypesofplants&equipmentlikehighfrequencyinductionfurnace,
meltingunitsetc.,
3 They need special type of technology at every
stage.E.g.:melting,rolling,finishingetc.,

ALLOYSPECIALSTEELS:
TheconsumptionofalloysteelsinIndiahasincreasedoverperiodoftime.Indeveloped
countriestheconsumptionofalloysteelabout46%ofthatoftotalsteelconsumption.
ThepresentageofconsumptionofalloysteelinIndiahasbeenintherange46%ofmild
steelduring199498periodinlinewithinternationalnorms,itisseenthatimportsofalloysteels
hasbeenslowlyincreasedandisaround100000tonsperyearforthelasttwoyears,whichisabout
tenpercentageofindigenousproduction.
Thealloysteelisgenericnameandgenerallysubdividedintothefollowinggrades:
Coldbearingquality
Ballbearingquality

Leadedfreecuttingquality
Spring steel, electrode quality
steelStainlessSteel
CarbonConstructionSteel
AlloyConstructionSteel

Thedemandforsteelandmetalinfuturewillbedrivenquality.Theprocessofproducing
qualitysteelproductsstartsfromtheselectionofrawmaterials.

CONCLUSION:
Overall industrial development of the country will necessarily call for a sound
infrastructure development particularly in the area in transport, communication, and civil
constructionetc.,thiscallforsubstantialconsumptionofsteel,particularlynonflatproducts.

18

COMPANYPROFILE
THEEVOLUTION
Adecadeago,agroupofyoungengineerscametogethertogiveshapetoalongheldvision.
ThatvisionistrulythebluechipRs.6820millionturnoversujanagroups,withsignificant
presenceinSouthIndia.
SUJANAGROUP:
ThesouthIndiabasedsujanaGroup,inlittleoverdecade,hasemergedasoneoftheregions
importanteconomicplayerandaforcetobereckonedwith.
TheconstituentcompaniesoftheGroupare:
SujanaIndustriesLimited.
SujanaSteelsLimited.

PadminiSteelsCorporationLimited.
SujanaPowergen(Tuticirin)Limited.
SujanaPower(Gangikondan)
Limited.SujanaCorporationLimited.
MISSION:
Toachieveglobalstandardsinexcellenceinmanufacturingandtradinginvariousrangesofproducts
andappearanceanddomesticandinternationalmarkets,caringforcustomersatisfaction.

Create infrastructure with a skilled human resource and modern technological base for
developmentofbusiness.
Toregistergrowthstepbystepanddevelopstrategiestofacenewchallengesinaliberalized
marketeconomyandglobalization.
Togenerateadequatereturnoninvestmenttomeettheinterestofshareholdersandinvestorsby
achievinghighstandardsofproductivityandquality.
To enrich and enhance employees growth and contribution by fostering groups corporate
culture,valuesandethos.

19

OBJECTIVES:

Maintainsmoothanduninterruptedsupplyofproductsbykeepingadequateinventoriesand
stocks;toensureproductavailabilityinallmarkets.
Optimizeutilizationofexistinginfrastructureandoperateatinstalledcapacitiestomaximize
productionandenhanceefficiency.
Shoreupmanpowerskillsandtechnicalexpertiseaimedatselfrelianceimplementationof
expansionprogramsanddiversificationofplans.
To consolidates and sustain growth by developing suitable structure, inducting monitoring
systemforcosteffectivenessandexercisingcontrolsatlevelsforeffectivefunctioning.
INHERENTSTRENGTHS:
Survivedthroughturbulenttimesofindustry.
BISStandardcompliancequalityproducts.
Strongcoretechnicalteamandlowemployeeturnover.
Capacityforflexibledesignsandsmallbatchsizes.

Efficientuseofinfrastructure.
OPPORTUNITIES:
Marketvalueaddedproductsthroughinnovationanddevelopment.
Good growth prospects for galvanized towers for power transmission and
telecom.Astronggrowthininfrastructureindustry.
Growthinhousingsectorexpectedtocontinue.
Increasedexportdemandforgalvanizedproductsandreductionoftariffbarriers.
O

WaiverofantidumpingdutybyVSA.

Concessionaltariffsfor SAARC

countries.

20

STRATEGIES:
Takingadvantagesofliberalizationpolicies,thegrouphasdevisedstrategiesto
Identify the thrust areas and steels and
bearingsDiversifyintoinfrastructureareas
Addandexpanditsexistingplantcapacities.
Maintainitsglobalstandardsofexcellence.

Emergeasakeyplayerbothindomesticandinternationalmarkets.
OBLIGATIONS:
TowardsShareholders:
Toensuregrowthprojectionarematchedbyperformancetobuildconfidenceand
goodwill.
Toensureareasonableannualdividendcommensuratewithcompanysperformance
profitsandfutureplansforinvestments
TowardsCustomersandDealers:
Toprovideaqualityproductandspreadawarenessamongstthemforcompetitive
sellinginbuyersmarkedbackedbyworldclasscustomerservice.
TowardsEmployees:
To develop and upgrade their skills through in house and external training
programsenablingcareersprogressionsandadvancement.
Theinputsforupgradingmanagerialandoperationalskillsareprovidedtomeet
presentandfuturechallenges.
Towardsthecommunity:
Totheensureenvironmentalprotectioninandaroundplantoperationalareasand
promotedevelopmentofcommunitybyparticipatinginseveralactivities.

21

ANEXTENSIVEPRODUCTRANGE:
TheproductsofSujanaMetalProductscomeincomprehensiverange:
MSequalangles
MS

unequalled

anglesEN8rounds
MS8rounds
EN8squares
MSflats
HCSoctagons
CTDbars

Flats
Channels
Beams

MARKETINGEDGE:
Widemarketingnetworkdirect,tradinghouses,consignmentagents
etc.,Productsapproved.
Experiencedininternationaltrading.
Domestic customers include large and reputed corporate like L&T, Kirby, Nagarjuna,
IVRCL,MadhuconglobalteleTATAtele,Powergridcorporationetc.,

22

MILESTONESOFTHESUJANAGROUP:
1986 :Aperfectengineerworkswasformedtomanufacturingfansandperfectrerolling
millswasalsoformedtomanufacturererolledconstructionsteelrods.
1987

:SujanaIndustriescommenceditsoperations

1988

:SujanaSteelsincorporatedandcommencesoperations

1989

:SujanaCorporationincorporated

1990:Installedcapacityofbearingdivisionincreasedto1.8millionperannum
1991:Exportoffans,bearingsteelsandgranitescommences
1992:SujanaIndustriesoffersrightsissuedtothetuneofRs64.57million
1993:Sujanacorporations100%EOUgraniteunitcommences
1994

:Sujanaintroducezephyrrangeofdecorativeceilingfans

1995:ThebearingcapacityofSujanaIndustryincreasesto2.4millionperannum.
1996:SujanaIndustriesgoesinforprivateplacementofequityshares
1997 :Sujanagroupallotted2*105MWpowerprojectsattuticorinandgangikondanfor
implementationunderinternationalcompetitivebidding.
1998 :Sujanasteelsincorporatespadminicorporationforsettingup125000TPAmodern
steelrollingmillnearChennai
1999 :SujanaGroupdisinvestfromSujanacorporationandnameofthecompanychangedto
libertycorporation
2000:SujanaIndustriesratedPRI(adequatesafety)byCAREforshorttermdebtinstruments.
2001:Sujanapowerprojectsreceivedgaslinkagefromministryofpetroleumandnaturalgas.
2002:Sujanaimplementedanewlineofactivitymanufacturingofgalvanizedsteelstructures
andtowerparts
2003 : Sujana took up new development activity to find new users for the existing steel
productsandmanufacturesofnewsteelproductsanticurvesivsteel,epoxycoated
steelalloysteeletc.,
2004 :TMT(TermomechanicallyTreatedbars)anewlineadvancedsteeltoresistthe
corrosion,wasbroughttomarketunderthebrandnameofSUJANATMTwhichiswell
acceptedbythemarket.

23

SHAREHOLIDNGINSUJANAMETALPRODUCTSLTD:
CATEGORY

%OFSHAREHOLDING

Promotersholding
Promoter

13.12

PersonalA/cinconcert

19.80

NonPromotersholding
Industrialinvestors
Banks/FinancialInst

4.04

Others
PrivateCorporatebodies

36.57

IndianPublic

26.47

TOTAL

100.00

24

MANUFACTURINGPROCESS

RawMaterial
IfSpaceareNotMet
Chemical&
PhysicalTest
FollowProcedureControlof
NonConfirmingProduct
StoreinRawMaterialYard

Cuttosizesasperrequirement
FeedingintoReHeatingFurnace

Rollingroughingmill.
Intermediatemillfinishingmill
Test
Physical
dimensi
ons

IfNotAccepted

Contr
olling

Rejection

IfNotAccepted

Rejection

S
a
m
p
l
i
n
g

i
n
s
p
e

Cutt
ing
c
t&
i
op
nh
y
fs
oi
rc
a
cl
h
ep
m
r
io
cp
ae
lr

to gulateLength&
Re Straightening
t

25
Fi
nis
he
d
Go
od
s
Ya
rd

ORGANIZATIONSTRUCTURE:
Chairman

Y.SChowdary

ManagingDirector

RKBirla

Directors

D.Srinivasaraju
Y.VRameshnaidu
(IFCINominee)
S.HanumanthaRao
T.Ramakrishna
V.BChadha
K.Srinivasarao
(IREDANominee)
V.MalakondaReddy

FinancialInstitution

IFCTLTD
IDBI

Listing

HyderabadStockExchangeLtd
Somajiguda,Hyderabad
BombayStockExchange
DalalStreet,Bombay
MadrasStockExchange
112thLinebeach,Chennai.

Bankers

BankofBaroda
BankofRajasthan
IndusInd.BankLtd.,

ShareTransferCommittee

Y.SChowdary
R.KBirla
G.SrinivasaRaju

Shareholdergrievance
Committee

Y.SChowdary
G.SrinivasaRaju
S.HanumanthaRao

26

CHAPTERIII
THEORITICALFRAMEWORK

MEANINGOFINVENTORY
Inventoryisalistforgoodsandmaterials,orthosegoodsandmaterialsthemselves,held
availableinstockbyabusiness.Itisalsousedforalistofthecontentsofahouseholdandfora
listfortestamentarypurposeofthepossessionsofsomeonewhohasdied.Inaccounting
inventoryisconsideredanasset
TYPESOFINVENTORIES
Inventoriesplayamajorroleinabusinessordependingonnatureofthebusinesses.
Theinventoriesmaybeclassifiedasunder.

(I)RawMaterials
Materialsandcomponentsscheduledforuseinmakingaproduct.Thesearethebasic
inputs,whichareconvertedintofinishedproductsthroughmanufacturingprocess.Rawmaterial
inventoriesarethoseunits,whichhavebeenpurchasedandstoredforfutureproduction.

.(II)Workinprocess/Progress
Materialsandcomponentsthathavebeguntheirtransformationtofinishedgoods.
Materialsissuedtothestopfloor,whichhavenotyetbecomefinishedproductstheyarevalue
addedmaterialstotheextentoflaborcostincurred.

(III)FinishedGoods
Afinishedgoodsisacompletedpartthatisreadyforacustomerorder.Thesegoodshave
beeninspectedandhavepassedfinalinspectionrequirementssothattheycanbetransferredout
ofworkinprocessandintofinishedgoodsinventory.Fromthispoint,finishedgoodscanbe
solddirectlytotheirfinaluser,soldtoretailers,soldtowholesalers,senttodistributioncenters,
orheldinanticipationofacustomerorder.

STORES&SPARES
The level of four kind of inventory depends upon the nature of the business.
Suppliesincludeofficeandcleaningmaterialslikesoap,brooms,oil,light,blubsetc.these
materialsdonotdirectlyenterproduction,butarenecessaryforproductionprocess.

27

.
NEEDORINVENTORYCONTROL

Transactionmotive:
Everyfirmhastomaintainsomelevelofinventorytomeetthedaytodayrequirementof
sales,productionprocess,customerdemandetc.Inthefinishedgoodsaswellasrawmaterial
arekeptasinventoriesforsmoothproductionprocessofthefirm.

Precautionarymotive:
Afirmshouldkeepsomeinventoryforunforeseencircumstancesalsolikelossdueto
naturalcalamitiesinaparticulararea,strikes,layoutsetcsothefirmmusthavesomefinished
goodsaswellasrawmaterialstomeetcircumstances.

Speculativemotive:
Thefirmmaybemadetokeepsomeinventoryinordertocapitalizeanopportunityto
makeprofitduetopricefluctuations.

BASICREASONSTOKEEPINGANINVENTORY:
Therearethreebasicreasonsforkeepinganinventory:

1. TIME:Thetimelagspresentinthesupplychain,fromsuppliertouserateverystage,
requiresthatyoumaintaincertainamountofinventorytouseinthisleadtime.
2. UNCERTAINTY: Inventories are maintained as buffers to meet uncertainties in
demand,supplyandmovementofgoods.
3. ECONOMIESOFSCALE:Idealconditionofoneunitatatimeataplacewhereuser
needsit,whenheneedsitprincipletendstoincurlotsofcostsintermsoflogistics.So
bulkbuying,movementandstoringbrings.

28

INVENTORYMANAGEMENT
Inventorymanagementisprimarilyaboutspecifyingthesizeandplacementof
stockedgoods.
Inventorymanagementisrequiredatdifferlocationswithinafacilityorwithin
multiplelocationsofasupplynetworktoprotecttheregularandplannedcourseofproduction
againsttherandomdisturbanceofrunningoutofmaterialsorgoods.Thescopeofinventory
managementalsoconcernsthefinelinesbetweenreplenishmentleadtime,carryingcostsof
inventory,assetmanagement,inventoryforecasting,inventoryvaluation,inventoryvisibility,
featureinventorypriceforecasting,physicalinventory,availablephysicalspaceforinventory,
qualitymanagement,replenishment,returnsanddefectivegoodsanddemandforecast.

Inventorymanagementinvolves:

Inventorymanagementistheactivecontrolprogramwhichallowsthemanagement
ofsalespurchasesandpayment.
Systemandprocessesthatidentifyinventoryrequirements,settargets,provide
replenishmenttechniquesandreportactualandprojectedinventorystatus.

Inventorymanagementhelpsprovidingagoodunderstandinggroundandthecapacity
tocontrolfinancialcosts.
TheInventorymanagementwillcontroloperatingcostsandprovidebetterunderstanding.

29

OPERATINGCYCLEOFINVENTORYMANAGEMENT
OperatingCycleisthetimedurationtoconvertsalesaftertheconversionofresourcesinto
invention,intosalesthereisdifferencebetweencurrentassetsandfixedassets.Afirmrequired
manyyearstorecoverinitialinvestsinfixedassetssuchplantandmachineryorlandbuildingsor
furnitureandfixturesetc.Onthecontrary,investmentincurrentassetssuchasinventoryand
booksdebtsarerealizedduringthefirmsoperatingcycle,whichinusuallylessthanayear.
Theoperationcyclecanbesaidtobetheheartoftheworkingcapital.Theneedfor
workingcapitalorcurrentassetscannotbeoveremphasizedasalreadyobserved.Themain
motiveofmanybusinessfirmsistoachievemaximumprofits,whichcanbeearneddepending
uponthemagnitudeofthesalesamongotherthings.However,salesdonotconvertintocash
instantly.Thereisinvariabletimelagbetweensaleofgoodsandreceiptsofcash.Thereforethe
needofworkingcapitalintheformofcurrentassetstodealwiththeproblemarisinggoodsold.
Therefore,sufficientworkingcapitalrequiressustainingsalesactivity.Technicallythisisrefer
toastheoperatingthecashcycle.Thecontinuousflowformcashtosuppliestoinventoryto
accountsreceivableandbackintocashwhatiscalledoperatingcycle.

Cash

Debtors

Rawmaterial

Sales

WorkinProgress

FinishedGoods

30

Theoperatingcycleofmanufacturingcompanyhasthreephasesnamely

1. Acquisitionofresources
2. Manufacturingproducts
3. Saleofproduct

Acquisitionofresources:
Inthephasefirstoperatingcycle,includephasesofrawmaterials,fuel&power
etc.,whicharetotallyrequiredormanufacturingproduct

Manufacturingproducts:
Inthephase2oftheoperatingcycleincludesconversionofrawmaterialintowork
inprogressandtheworkinprogressisconvertedintofinishedgoods.

Saleofproduct:
Inthephase3oftheoperatingcyclemaysaletheproducteitherforcreditismade
tocustomers.

REASONSANDBENFITSOFINVENTORY:
Theoptimalleveltomaintaininginventoryissubjectivematteranddependsuponthe
featuresofaparticularfirm.
Tradingfirm
Incaseofatradingfirmtheremaybeseveralreasonsforholdinginventoriesbecauseof
salesactivitiesthatshouldnotbeinterruptedmoreoveritnotalwayspossibletoprocurethe
goodwheneverthereisasalesopportunitythereisalwaysatimegaprequiredbetween
purchaseandsaleofgoods.Thustradingconcernshouldhavesomestockoffinishedgoodsin
ordertoundertakesalesactivitiesindependentoftheprocurementschedule.
Similarly,afirmmayhaveseveralincentivesbeingofferedintermsofquantitydiscounts
orlowerpriceetcbythesupplierofgoods.Thereistradingconcerninventoryhelpsinade
inkingbetweensalesactivityandalsotocapitalizeaprofitofopportunityduetopurchase
makeatadiscountwillresultinloweringthetotalcastresultinginhigherprofitsforthefirm

31

Manufacturingfirm
Amanufacturingfirmshouldhaveinventoryornotonlythefinishedgoods,but
alsoofrawmaterialsandworkinprogressforfollowingreasons.
Uninterruptedproductionschedule
Everymanufacturingfirmmusthavesufficientstockofrawmaterialsinordertohavethe
regularanduninterruptedproductionschedule.Ifthereisstockoutofrawmaterialsinorderto
havetheregularanduninterruptedproductionschedule.Ifthereisstockoutofrawmaterialat
anystageofproductionprocessthenthewholeproductionmaycometoahalf.Thismayresult
incustomdissatisfactionasthegoodscannotbedeliveredintimemoreoverthefixedcostwill
continuetobeincurredevenifthereisnoproduction.
Furtherworkinprogresswouldlettheproductionprocessrunsmooth.Inmostof
manufacturingconcernstheworkinprogressisanaturaloutcomeoftheproductionschedule
anditalsohelpsinfulfillingwhensomesalesorders,evenifthesupplyofrawmaterialshave
stopped.

32

ESSENTIALSOFINVENTORYCONTROL
Theimportantrequirementsofinventorycontrolare:

1 Afirmneedsinventorycontrolsystemtoeffectivelymanageitsinventory.
2 Properclassificationofmaterialswithcodes,materialstandardizationandsimplification.
3 Theoperationofasystemofinternalchecktoensurethatalltransactionsinvolvingmaterial
andequipmentarecheckedbyproperlyauthorizedandindependentpersons.
4 Theoperationofasystemofperpetualinventorysothatitispossibletodetermineatanytime,
theamountandvalueofeachkindomaterialinstock.
5 Asuitablemethodofvaluationofmaterialsisessentialbecauseitaffectsthecostofjobsand
thevalueofclosingstockofmaterials.

ObjectivesofInventoryControl
Themainobjectivesofinventorycontrolare:

1. To maintain a large size of inventory for efficient and smooth production and sales
operation.
2.

Tomaintainaminimuminvestmentininventoriestomaximizeprofitability.

3. Toensureacontinuoussupplyofrawmaterialstofacilitiesuninterruptedproduction.
4. Tomaintainsufficientstocksofrawmaterialsinperiodsofshortsupplyandanticipate
pricechange.
5. Maintainsufficient finished goods inventoryfor smooth sales operationandefficient
customerservices.
6. Minimizethecarryingcostandtime.
7. Controlinvestmentininventoriesandkeepitatanoptimumlevel.

33

AdvantagesofInventoryControl
Thefollowingaresuggestedadvantages:

1. Eliminateswastagesinuseofmaterial.
2. Itreducestheriskoflossformfraudandtheft.
3. Ithelpsinkeepingperpetualinventoryandotherrecordstofacilitatethepreparation
ofaccuratematerialreportsmanagement.
4. Toreducethecapitaltiedupininventories.
5. Itreducescostofstorage.

DisadvantagesofInventoryControl
Everyfirmhastomaintainoptimallevelofinventories.Itnotthefollowingwillbethe
resultinformoflosses.

1. Opportunitycost:Everyfirmhastomaintaininventoryforthatsomeinvestmentis
neededitisknownasopportunitycostandhandletheinvestmentininventoryaremorethe
fundsareblocksupwithinventory.
2. Excessiveinventories:Itwillleadtofirmlossesduetoexcessivecarryingcoststherisk
ofliquidity.Itisalsoreferredasdangerlevel.
3. InadequateInventory:Itisanotherdangerwhichresultsisproductionholsupand
failuretomeetdeliverycommitments.Inadequaterawmaterialsandworkinprocess
inventorswillresultsinfrequentproductioninterruptions.Itfinishedgoodsarenotsufficient
customersmayshiftstocompetitors.
4. Dangerduetophysicaldecoration:Itisoneofthereasonwiththeinventoriesdueto
maintainingstocksathighlevelstheywillbedeterioratedduetopassageoftime,sometimes
duetomishandlingorimproperstoragefacilities.

34

CostsinvolvedinInventory
Everyfirmsmaintainsinventorydependinguponrequirementandotherfeaturesoffirm
forholdingsuchinventorysomecostwillbeincurredthereareasfollows.
CarryingCost
Thisisthecostincurredinkeepingormaintaininganinventoryofoneunitofraw
materials,workinprocessorfinishedgoods.Heretherearetwobasiccostinvolved.
CostofStorage
Itincludescostofstoringoneunitorrawmaterialsbythefirm.Thiscostmaybeforthe
storageofmaterials.Likerentofspacesoccupiesbystock,stockforsecurity,costof
infrastructure,costofinsurance,andcostofpilferage,warehousingcosts,handlingcostetc.

CostofFinancing
Thiscostincludesthecostoffundsinvestedintheinventories.Itincludestherequiredrateof
returnontheinvestmentsininventoryinadditiontostoragecostetc.Thecarryingcostinclude
thereforebothrealcostandopportunitycostassociatedwiththefundsinvestedintheinventories.

Thetotalcarryingcostisentirelyvariableandriseindirectlyproportiontothelevel
ofinventoriescarried.
Totalcarryingcost=(carryingcostperunit)X(Averageinventory)
CostofOrdering
Thecostoforderingincludesthecostofacquisitionifinventories.
Itisthecostofpreparationandexecutionofanorderincludingcostofpaperwork
andcommunicatingwiththesupplier.
Thetotalorderingcostisinverselyproportiontoannualinventoryoffirm.Theordering
costmayhaveafixedcomponent,whichisnotaffectedbytheordersize:andavariable
component,whichchangeswiththeordersize.
TotalOrderingCost=(Nooforders)X(costperorder).
CostofStockout
Itisalsocalledashiddencost.Thestockoutisthesituationwhenthefirmisnothaving
unitsofanitemisstoresbutthereisademandforthatitemeitherforthecustomersorthe
productiondepartment.Thestockoutreferstozerolevelinventories.Sothereisacostofstock
outinthesensethatthefirmfacesasituationoflostsalesorbackorders.Thestockoutsare
quiteoftenexpensive.
Eventhegoodwilloffirmalsobeeffectedduetocustomersdissatisfactionandmaylose
businessincaseoffinishedgoods,whereasinrawmaterialsorworkinprocesscancausethe

35

Productionprocesstostopanditisexpensivebecauseemployeeswillbepaidforthetime
notspineinproducinggoods.
Thecarryingcostandtheorderingcostareoppositeforcesandcollectively.Theydetermine
thelevelofinventorsinafirm.
TotalCost=(Costofitemspurchased)+(TotalCarryingandorderingcost)

ValuationofInventory
Themethodsofvaluinginventoryarecombinationoftheactualcostandreplacement
costplans.Thechiefadvantageofthecostornetrealizablevalueruleisthatitisconservative.
Hencethemethodsofvaluationofinventoryarequiteindependentofsystemofmincing.
Inbalancesheetclosingstockisshownundercurrentassetsanditalsocreditedto
manufacturingortradingaccounts.Theinventoriesarevaluedonthebasisasfollows:

I)Costofrawmaterialsinstockmayincludefreightchargesandcarryingcost.Butsuch
costshouldnotexceedmarketprice.
II)Workinprocessisgenerallyvaluedatcost,whichincludescostofmaterials,labor.And
theproportionatefactoryoverhead,asitisreasonableaccordingtodegreesofcompletion.

III)Costoffinishedgoodswoundnormallytothetotalorfullcostitincludesprimecostplus
appropriateamountoftheoverhead.Sellinganddistributioncostisdeductedontheother
handworkinprogressmaybevaluedatworkinprogressmaybevaluedatworkcost,
marginalcost,primecostor,evenatdirectmaterials.

Purchase&storesprocedure
Ininventorymanagementthepurchasedepartmentstoredepartmentplaysamajorroleto
betheeffectiveinventorytheremustbecooperationofvariousdepartmentssuchaspurchase
receivingandinspectionstoresproductionandstockcontroldepartments.
Themainfunctionsofeachdepartmentareasfollows:

PurchaseDepartment
Itisresponsibleforpurchaseofallnecessarygoodsofproperqualitytoproduces,
withoutinterruptiontosupplythefinishedgoods.

1) Itreceivespurchaserequisitions.
2) Invitesquotationsortendersfromsupplierswithdesiredquality.
3) Issuepurchaseorderstotheselectedsupplier.
4) Certifythequalityandquantityoforderreceivedinspecifiedtime
5) Approvepurchaseinvoiceforpaymentaftercheckinginvoiceforpayingafterchecking
pricesandextensionsifanyneeded.

36

MaterialCost
Materialscostofajoborcostunitcanbeascertainedbymultiplyingthequantityconsumed
forthejoborcostunitbythepriceofthematerials.Forascertainingthequantityconsumedfor
eachjoborcostunitwehavedevisedmaterialrequisitionwhichwillindicatethequantityrequired
forthejobandthejobnumberagainstwhichthematerialcostwillbechangedirectly.
Forindirectmaterialissuedthematerialrequisitionwillnotindicatethejobnumberbutthe
costcenternumberwillbeindicatedforchargingtorelevantcostcenterasindirectmaterials.

Thusinordertoascertainmaterialcost.

1. Makevaluationofpurchase.
2. Make use of proper valuation of material issue and closing stock following
differentmethodsuchas,FIFO,LIFOWEIGHTEDAVG.Etc.
Thepurchasepriceofmaterialisdirectlyobtainedfromthesuppliersreceivesandhaveto
beissuedtoproductionbeforetheinvoiceofmaterialsisreceived.
Therateperunit,totalpriceoftheitemasshowninthepurchaseorderplussundry
chargessuchasdeliveryandforwardingchargessalestax,dutyetc,maybeborneby
suppliers,governmentscontrolledpricesbynotifications,suppliers,cataloguesandcirculars
maybevaluableguidesforobtainingratesofmaterials.
Deliverychargesmaybeestimatedwithreferencetothekindoftransportwithcharges
incurred.Thepricemayalsoincludesalestax,exciseduty,frightetc,sothetotalcostandrate
perunitcanbecomputedandenteredinthestoresreceivedregisteredandpostedtostores
ledgerfortheissueofmaterialtoproduction.
Insomecasesmaterialneedsadjustmentforanydiscountallowedchargesfor
transportcontainersetc.
Discountsmaybeliketradediscountsquantitydiscount,cashdiscountsetc.
Transportationandstoragecostsmaynotincludethecostofair,seaonlandtransportand
otherstorescosts,wherethepurchaserhastobearthecosts.Costofcontainerswithregarded
maynotmakeaseparatechargebecauseofnonrefundableandalsosalestax,exciseduty,
insuranceetc.,alltheitemsareaddedto
Purchase
price.

37

ReceivingandInspectionDepartment
1) Receivingallrawmaterialsandothersuppliesfromvarioussuppliers.
2) Verifyitemsbycount,weightetc.,andreportanyshortage
3) Inspectmaterialsandsuppliedastoqualitybyanalyzingthemsuitably.
4) Inform the purchasing department and accounts department all facts that may require
adjustmentwithvendor.
e)Analyzeandgivethemthecodedependinguponthetypeofmaterials.

StoreskeepingDepartment
1) Checkandacceptallmaterialsformthereceiveddepartment.
2) Identityeachmaterialreceivedwiththestocklist,checkthecodenumberandplacein
therespectivebins.
c)Issuematerialsandsuppliesforuseuponpresentationofauthorizedrequirement.
d)Recordquantitiesreceivedandissuedonbinlardsorstockledgercardsconsisting
theperpetualinventoryrecords.
ProductionDepartment
Makeoutmaterialsrequirementnotei.e.requisitionofrequisitequantityandqualityof
materialsattherightmomentsotheallmaterialsmaybeavailablewithoutdelayonproduction.

1) Check and verify that the materials of requisite quantity and quality have been
receivedandchargedtoproduction.
2) Keep proper records or materials received and their progress through different
operationsorprogress.
3) Preparematerialsreturnnoteforexcessmaterials.
4) Preparematerialstransfernotetocoveranytransferofmaterials.
5) Preparereportonscrapforreportingtomanagement.

38

InventoryControlDepartment
Inmaybeasubdivisionofthecostaccountingdepartment,althoughinmanyconcerns,it
isapartofthestoreskeepingdepartment.

1) Itkeepsperpetualinventoryrecords.
2) Adjustthestockonreceiptofthepropertyauthorizedadjustmentnotes.
3) Prepare weekly or monthly, statement of receipts, issue, balance and average
consumptionofmaterialsbothintermsofquantityandvalue.

RECEIPTANDISSUEOFINVENTORIES:

(a)ReceiptInventoriesintostore:
Afterincomingmaterialshavebeenexaminedandapprovedtheyarepassedontothe
appropriatestorestogetherwiththegoodsreceivednote.Articlesareinspectedandpassedand
onthestoresintheusualway.Inordertokeeptheaccountingprocedureuniform,itisdesirable
thatagoodsreceivednotebepreparedforthesearticlesalso,thestorekeeperthanplacesthe
inventoryinappropriatebinorshelfandmakenecessaryentriesinthereceiptcolumnofthe
BinCard.
Alocationcodeformaterialshelpsinproperstorekeepingwithgreaterefficiency,because
storescanbeeasilyidentified.Itisapartandparcelofstockcontrolprocedure.Locationcode
helpsinmechanizedaccountingandsafeguardagainstomissionincountingasverification.

39

BINCARD
DESCRIPTION:MAXIMUMLEVEL:
MATERIALCODE:
MINIMUMLEVE:
LOCATIONCODE:
ORDERINGLEVE:
BINNO:
ORDERINGQUANTITY:
STORESLEDGERNO:UNITS:

RECEIPTS
Date

ISSUES

Goodsreceived

Qty

NoteNo.

(units)

Date

BALANCE

Requisition Qty
NoteNo.

(units)

Qty(units)

AUDIT
Initial&
Date

40

BINCARD
ForeachkindofmaterialsorarticleaBinCardattachedtothebinwhicheach
individualsmaterialsisstored.Abincardprovidesarunningrecordofreceipts,issuesand
stockinthesimplestform.Anentrywillbemadeatthetimeofeachreceiptorissueandnew
balancewillbeextended.
Thesecardsshouldagreewiththequantitiesenteredintherelevantaccountsinthestores
ledge.Themainadvantageistoenablethestoreskeepertoascertainataglancethequantityof
materialsinstockandremindhimtoplacepurchaserequisitionforfurthersuppliersthe
orderinglevelhasbeenreachedmoreovertheyprovideonindependentcheckonstoresledger
andancientlyasecondperpetualinventory.Ifthebincardisfromthreeyearsthenthe
transactionsaremadeinsamecard.IfBinCarddoesnotexistnewBinCardtobeopened.

IssueofMaterialfromStores
Thestorekeeperissuematerialsonreceiptofproperauthorizeddocumentusually
calledamaterialsrequisitionoraspecificationofmaterial.Materialrequisitionisa
documentwhichauthoritiesandrecordstheissueofmaterialsforuse.
Thematerialsrequisitiondetailstheitemsrequiredfortheshowingthequantity,
description,andcodeorpastnumberandthecostcenterofjobtobecharged.Requisitionis
normallypreparedintriplicate:thedepartmentreceivingthegoodsretainsonecopyandthe
othertwocopiesarehandedovertothetwocopiesarehandedovertothestorekeeper.He
keepsonealongwithhimandentersontheissuesidesoftheappropriatebincarddaytoday
transactionsarenotedinstoresledger.Storesledger:
Thestoresledgerwhichisusuallyalooseleaforcardtype,containsanaccountforeach
classofmaterialstheirledgeriskeptinthecostdepartmentandcontainssuchinformationas
wellfacilitatetheascertainmentofalldetailsrelatingtothematerialsintheminimumoftime.

41

STORESLEDGERACCOUNT
FORMNO: FOLIO:
MATERIALS:

MAXIMUMLEVEL:

GRADE:

MINIMUMLEVEL:

UNITS:

ORDERINGLEVEL:

CODENO: ORDERINGLEVEL;

LOCATION
Date

CSRV/STDNO.MIRNO.ProductionOrderNo./SectionReceipts
&Issue
Quantity
In

42

MaterialsreturnedtoStores
Wherematerialsareissuedinexcessofrequirementtheexcessquantityisreturnto
thestoriestogetherwithmaterialsreturnnote.
Sincethematerialsreturntostoreformaworksorderisareductionintheamountrecorded
asissued,thepreferableentryistoenterthenumberofunitsandthevalueofmaterialsreturned
andreceivedinadifferentworkintheissuecolumnofthestoresledgeraccount.

Thesevaluesaredeductedfromtotalissues,andamountreturnedbyeachdepartmentas
shownbymaterialsreturnnoteisdeductedwherereturnofmaterialstostoresreturnofmaterial
tostoresisamajorproblemitiscustomarytouseamaterialsandsuppliesjournalforkeeping
recordsofitems.

MATERIALRETURNNOTE
FROM:

NO:

DEPARTMENT: DATE:
JOBNO:
ORDERNO:

Qty.

Description

CodeNo.

OfficeUseonly
Rate

Amount

Approved

Returned

Returned

BinNO.

Cost

by

by

by

Stores

officer

ledger

Ref.No.

Remarks
Pricedby

Follow
No.

43

MATERIALTRANSFERNOTE
NO:
FROM:
DEPARTMENT:
JOBNO:
ORDERNO:
Qut.

Description

DATE:
TO:
DEPARTMENT:
JOBNO:
ORDERNO:
CodeNo.

Officeuseonly
Rate

Approved

Issued

by

Received

CostRef.

by

No.

Remarks

Amount
Officer

Pricedby

Transferofmaterials
Transferofmaterialsformonejobtoanotherisprohibitedunlessthedetailisadequately
recordedonthematerialsTransfernote.Suchtransferispermissibleonlywhereanurgentorder
hastobemadeandworkstartedonalessurgentordermaybeappropriates.Suchanoteshows
areincessancydatefororderinganddebitingthecostaccountsaffected.Thesenotarepassed
directtothecostofficefortheappropriateadjustmentintheworkinprogressledger.

Allthesefournotesincludingstoresledgerandbincardaremajorforinventory
managementwhicharevaluedandcheckedforeveryquarterlyofhalfyearlyorannual

ValuationofMaterialsIssues
The fixation of the price at which the materials are issued are to be charged to
productionisanimportantonefromthepointofviewtoinventorymanagement.Theseare
numerousfactorstobetakenintoamountinpricingthematerialtheyare.

1) Thenatureofthebusinessandtypeofproduction.Thefrequencyofpurchase
pricefluctuationsandissuesofmaterials.
2) Rang of price fluctuation and value of material issued and size of bath of
materialsissued.
3) Requirementthatpurchasingefficiencyshouldberevealedornot.
4) Theaccuracywithwhichissuescanbecomputed.
5) The durability of stock i.e. whether it evaporates absorbs moisture or
deterioratesquickly.
6) Thelengthofinventoryturnoverperiodandquantityofmaterialtobehandledwith
thenecessityformaintaininguniformitywithinanindustry.
44

ISSUEPRICINGMETHODS
Therearetwocategories

(I)Costprices:
(a)FIFO (First in First
out) (b)LIFO (Last in
firstout)(c)Specificprice
(d)Basestockprice
(e)HIFO(highestinfirstout)

(35) Deliveredfromcostprices
(1) Simpleaverageprice
(2) Weightedaverageprice
(3) Periodicsimpleaverageprice
(4) Periodicweightedaverageprice
(5) Movingsimpleaverageprice
(6)Movingweightedaverageprice
(61) Notionalprices
(1) Standardprice
(2) Inflatedprice
(3) Reuseprice
(4) Replacementprice

FirstinFirstout(FIFO)
Thisisthepricepaidforthematerialfirsttakenintostockfromwhichthematerialto
bepricedcouldhavebeendrawn.
Underthismethodstocksofmaterialsmaynotbeusedupinchronologicalorderbutfor
pricingpurposeitisassumedthatitemslongestinstocksareusedupfirst.Themethodis
mostsuitableforusewhereinmaterialisslowmovingandcomparativelyhighunitcost.

Advantages:
(I)Priceisbasedonactualcostandnotonbasisofapproximationssuchasnoprofits
orlossesarisesbyreasonsofadoptingthismethod.

(35)
Theresultingstockbalancegenerallyrepresentsfaircommercialvaluationof
stock.
(61) Itisbasedontraditionalprinciples.

45

Disadvantages:
(9) Thenumberofcalculationsinthestoresledgerinvolvedtendsto
beComplicatedwithincreaseinclericalerror.
(35) The cost of consecutive similar jobs will differ if the price
changesSuddenly.
(III)Intimesofrisingprices,thechargetoproductionisundulylowas
theCostofreplacingthematerialwillbehigher.

Lastinfirstout(LIFO)
Thisisthepricepaidforthemateriallasttakenintostockfromwhichthematerialstobe
pricedcouldhavebeendrawn.Thismethodalsoensurematerialbeingissuedattheactualcost.Its
useisbasedontheprinciplethatcostsshouldbeascloselyaspossiblerelatedtocurrentprice
level.Underthismethodproductioncostiscalculatedonbasisonreplacementcost.

Advantages
(I)Productionischargedatthemostrecentpricessothatitisbasedontheprinciplethat
costshouldberelatedtocurrentpricelevels.
(II)Itobviatesthenecessityforcontinuouslyascertainingthereplacementprice.
(III)Neitherprofitnorlossisusuallymadebyusingthismethod.
(IV)Inthetimesofrisingpricesthereisnowindfallprofitaswouldhavebeenobtained
underFIFO.

Disadvantages
(I)Needsmoreclericalwork.
(II)Compassionamongsimilarjobsisverydifficult.
(III)Stockvaluesrelatingtopricesoftheoldestcostonhandmaybeentirelyoutofthe
currentreplacementprices.

Weightedaverageprice
ThisisthepricewhichiscalculatedbyZdividingthetotalcostofmaterialinthestock
fromwhichthematerialtobepricedhavebeendrawn,bythetotalquantityofmaterialinthe
stock.Thismethoddiffersfromallothermethodsbecausehereissuepricesarecalculatedon
receiptsofmaterialsandnotonissueofmaterials.Thusassoonasnewlotisreceivedanew
priceiscalculatedandissuesarethentaken.

46

Advantages
(I)thismethodisadvantageouswherethepricevarieswidelyasitsuseevenouttheeffect
ofthesewidevariations.
(II)Thebasisofpricecalculationsisasimpleoneinvolvingonlythedivisionoftotal
amountofmaterialinstockbyquantityinstock.
(III)Calculationofnewpricesarisesonlywhenreceiptofstocksarereceived.
(IV)Stockrecordsunderthismethodgiveafairindicationofthestockvalues,whichcan
beusedinfinancialanalysis.
Disadvantages
Thismethodiscompletedthansimpleaveragebecauseittakesintoconsiderationthe
totalquantitiesandtotalcostsinstock.
(9)
Profitorlossmaybeincurredasinsimpleaverageprice.
(35) AsLIFOorFIFOthismethodcallsformanycalculations.
(61) Inordertocalculatetheaccuratevalueofissuestheaveragepricemustnormally
becalculatedtofourtofivedecimalplaces.

Standardprice
Itisthepredeterminationoffixedpriceonbasisofaspecificationofallfactorsaffecting
pricelikethequantityofmaterialsinhandandtobenormallypurchasedandrateofdiscount
comparedwithexistingpriceincludingorexcludingfreightandwarehousingexpense.

Astandardpriceforeachmaterialissetandtheactualpricepaidiscomparedwith
standard.Itispaidexceedsthestandardalosswillberealizedifnotprofitwillbeobtained.

Advantages
(9)
(35)
(61)
(IV)
(22)
(VI)

Thismethodiseasytooperate.
Comparingtheactualpriceswiththestandardpricewilldeterminetheefficiencyof
purchasedepartment.
Theeffectofpricevariationsiseliminatedfromjobcosts.
Itreducesclassicalcostsbeeliminatingdetailedcostrecords.
Intimesofinflationorpricefluctuationsisverydifficulttofixastandardprice.
Thismethodalsoincursaprofitorlossonissuesandclosingstock.

Inflatedprice
Thisistheprice,whichincludesachargedesignedtocoverthecostofcontingencies
orrelatedcosts.
This price include not only the cost involved in bringing the material to the
purchasepremisesbutalsothelossduetoevaporationandbreakageetc,aswellas
carryingcosts.Increasedgraduallyeveryyearfrom2002to2005.

47

ARTICLE

ARTICLE1
Title: Areviewofinventorymanagementresearchinmajorlogisticsjournals:Themesand
futuredirections
Author(s): BrentD.Williams,(DepartmentofMarketingandLogistics,SamM.WaltonCollege
ofBusiness,UniversityofArkansas,Fayetteville,Arkansas,USA),TravisTokar,
(TheOhioStateUniversity,FisherCollegeofBusiness,MarketingandLogistics,
Columbus,Ohio,USA)
Citation: BrentD.Williams,TravisTokar,(2008)"Areviewofinventorymanagement
researchinmajorlogisticsjournals:Themesandfuturedirections",International
JournalofLogisticsManagement,The,Vol.19Iss:2,pp.212232
Inve 0
Keywords:
ntor 8
Article
y
9
type:
man 5
DOI:
age 9
ment 6
Publisher:
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0
Abstract:
Rese
arch, (
Sup P
ply e
chai r
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man a
age n
ment e
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Liter t
ature U
revie R
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)
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l
i
s
h
i
n
g

L
i
m
i
t
e
d

cont
ribut
eto
the
inve
ntor
y
man
age
ment
liter
ature
are
revie
wed
and
catal
PurposeThepurposeofthispaperis oged
.
toprovideareviewofinventory
The
managementarticlespublishedin
artic
majorlogisticsoutlets,identify
themesfromtheliteratureandprovide les
futuredirectionforinventory
are
managementresearchtobepublished seg
inlogisticsjournals.
ment
ed
base
Design/methodology/approach
Articlespublishedinmajorlogistics don
majo
articles,beginningin1976,which

rthemesextractedfromtheliteratureas
wellaskeyassumptionsmadebythe
particularinventorymanagement
model.
FindingsTwomajorthemesare
foundtoemergefromlogistics
researchfocusedoninventory
management.First,logistics
researchershavefocusedconsiderable
attentiononintegratingtraditional
logisticsdecisions,suchas
transportationandwarehousing,with
inventorymanagementdecisions,
usingtraditionalinventorycontrol
models.Second,logisticsresearchers
havemorerecentlyfocusedon
examininginventorymanagement
throughcollaborativemodels.
Originality/valueThispapercatalogs
theinventorymanagementarticles
publishedinthemajorlogistics
journalsfacilitatestheawarenessand
appreciationofsuchwork,andstands
toguidefutureinventorymanagement
researchbyhighlightinggapsand
unexploredtopicsintheextant
literature.
4
8

ARTICLE2

a
c RiskAversion
T inInventory
t
i Management
:
t XinChen
l Department
e ofIndustrial
: and
Enterprise
Aut Systems
hor Engineering,
(s): Universityof
Illinoisat
Urbana
Champaign,
Urbana,
Illinois
61801,
xinchen@uiu
c.edu
Melvyn Sim
Singapore
MITAlliance
andNUS
Business
School,
Ci National
tat Universityof
Singapore,
io
Singapore,ds
n: csimm@nus.
edu.sg
Key
wor David SimchiLevi
ds:
Departmentof
Civiland
A Environmental
rt Engineering
ic and
Engineering
le System
t Division,
y Massachusetts
Instituteof
p Technology,
e Cambridge,
: Massachusetts
02139,
Pu
dslevi@mit.edu
blis
her Eng Sun
FuquaSchool
:
ofBusiness,
Ab Duke
University,
str Durham,North

Car a erations.
oli r
na c Literature
27 h review
70 ,
8, Onlinein
psu R
n@ M Articlesin
du a Advance
ke. n September14,
u
Sub f 2007.
ject a
Purpose
clas c Traditional
sifict inventory
u
atio r modelsfocus
n: i onriskneutral
inven decision
ntor g makers,i.e.,
,
y/pr characterizing
odu S replenishment
ctio e strategiesthat
n: rv maximize
expectedtotal
poli i
profit,or
cies c equivalently,
, e minimize

unc , expectedtotal
erta costovera
inty a planning
; n horizon.Inthis
d
deci paper,we
sion S proposea
anal e frameworkfor
ysis rv incorporating
riskaversionin
. i
multiperiod
I ce inventory
n , modelsaswell
v asmultiperiod
e a
nt n modelsthat
o d coordinate
r inventoryand
y S pricing
m u strategies.We
a p showthatthe
n p structureofthe
a l
g y optimalpolicy
e foradecision
m c makerwith
e h exponential
nt a utilityfunctions
, i isalmost
R n
e identicaltothe
s o structureofthe
e p optimalrisk

neutd nmakerhas
ral t accesstoa
inveo (partially)
ntor m complete
y o financial
(an d marketandcan
d el hedgeits
pric s operationalrisk
ing) i throughtrading
poli n financial
cies w securities.
. h Computational
The ic results
se h demonstrate
stru t thattheoptimal
ctur h policyis
al e relatively
resu d insensitiveto
lts e smallchanges
are ci inthedecision
exte si makerslevelof
nde o riskaversion.
t iciesso costis
e asto
appropria
r maximiz tefor
i ethe risk
ra z expected neutral
di i total
decision
ti n profit,or makers,
ong equivale i.e.,
al ntly,to inventory
in r minimiz planners
ve e ethe thatare
nt p expected insensitiv
or l total
eto
y e cost
profit
m n Overa variation
odi planning s.
el s horizon.
s h Of
fo mcourse,
cu e this
s n focuson
ont optimizi
ch p ng
ar o expected
ac l profitor
49

ARTICLE3
Title:

PurchasingandInventoryManagement

Author(s):CharlesDominick
DPurchTipsEdition#116December27
Citation://Subjectclassification:inventory/production:policies,uncertainty;decision
analysis.Keywords:Inventorymanagement,Research,Purchasing.
Article
type:

Literaturereview

Abstract: PurposeFirst,youmustknowhowmuchinventorytohaveonhandtoensure
continuityofsupplyintheeventofanuncharacteristicincreaseineitherdemand
and/orleadtime.Thisquantityofinventoryiscalledthesafetystock.Thereisno
universallyusedformulafordeterminingsafetystockquantity,butPurchTipsS
Edition86suggestedariskaversecalculation.
Second,youmustknowwhentoreordermaterialsforinventory.Generally,thispoint
intimeisdeterminedwhenthequantityofmaterialsinstockdecreasestoacertain
level,calledthereorderpoint.Thereorderpointisdeterminedbytheformula:
ROP=SSQ+(QUDxALT)
Where,
ROP=ReorderPoint
SSQ=SafetyStockQuantity
QUD=QuantityUsedDaily
ALT=AverageLeadTime(indays)
Third,youmustknowhowmuchtoorder.Acomplexmathematicalequation
determinestheEconomicOrderQuantity,orEOQ.Theequationrecognizesthetug
ofwarbetweenacquisitioncostsandinventorycarryingcosts:whenyouorderbigger
quantitieslessfrequently,youraggregateacquisitioncostsarelowbutyourinventory
costsarehighduetohigherinventorylevels.Conversely,whenyouordersmaller
quantitiesmoreoften,yourinventorycostsarelowbutyouracquisitioncostsare
higherbecauseyouareexpendingmoreresourcesonordering.TheEOQistheorder
quantitythatminimizesthesumofthesetwocosts.
Fortunately,inventorymanagementsystemscalculatetheEOQforyou.Butifyou
wanttoseetheEOQequation,checkoutmyblogpostentitledPurchasingand
InventoryManagement.

50

CHAPTERIV
DATAANALYSIS

DATAANALYSIS
TechniqueofInventoryManagement:
Mainproblemsininventorymanagementaretoanswer:
WhatareIndusproblemsinmanaginginventories?
Which inventory policy optimum for Indus? Why? Show
calculations.Whatshouldbetheoverlevel?

Toanswerthesefollowingtechniquesareused:
1*
2*
3*
4*
5*
6*

ABCanalysis
EconomicOrderQuantity
VEDAnalysis
ReOrderLevel
Safetystock
InventoryTurnoverRatio

ABCAnalysis
1*
2*
3*

Itisbasedonpropositionthat
Managerialitemsandeffortsarescareandlimited.
Someitemsofinventoryaresomeimportantthanothers.

ABCAnalysis
ABCanalysisclassifiesvariousinventoryintothreesetsorgroupsofprioritythe
allocatesmanagerialeffortsinproportionof
TheprioritythemostimportantitemareclassifiedintoclassA,
ThoseofintermediateimportanceareclassifiedasclassBandremainingitemsare
classifiedintoclassC.
Thefinancialmanagerhastomonitortheitemsbelongingtomonitortheitemsbelonging
todifferentgroupsinthatorderofpriorityanddependingupontheconsumptions.
Theitemswiththehighestvaluesisgivenpriorityandsoonandaremorecontrolledthen
lowvalueitem.Thererationallimitsareasfollows.

Category
A
B
C

%ofitems
510
1020
7085

%oftotalcostofmaterials
7085
1020
510

51

Procedure
(I)Itemswiththehighestvalueisgiventoppriorityandsoon.
(II)Thereaftercumulativetotalsofannualvalueconsumption
areExpressedaspercentageoftotalvalueofconsumption.
(III)Thenthesepercentagevaluesaredividedintothreecategories.
ABCanalysishelpsinallocatingmanagerialeffortsinproportiontoimportanceof
variousitemsofinventory.

ABCAnalysis
Rawmaterial(atclosingstock)
YEAR
2006
2007
2008
2009
2011

AMOUNTOFRAWMATERIALS
274.94
582.11
1858.17
2031.85
1768.52

2500
2000
Amount of
raw
materials
in
Lakhs

1500
1000
500
0
2006 20072008 20092011

Interpretation:
Theabovegraphshowstheamountofrawmaterialsatcost.In2006thecostofmaterialis
274.94rsincreasedinthisyearandin20072008.Itismoreincreasedto1858.17rsandin2009
itisincreasedtors2031.85andin2011itisdecreasedto1768.52.

52

Stockinprocess(atclosingstock):

YEAR
2006
2007
2008
2009
2011

AMOUNTOFSTOCKinPROCESS
2006.20
82.67
122.82
110.96
NILL

20000
15000

Amount of stock
in
process

10000
5000
0
2006

2007 2008 20092011

Interpretation:
Theabovegraphshowsthatworkinprogressatcost.In2006thecostofmaterialis2006.20
rsincreasedinthisyearandin2007itisdecreasedtors82.67intheyear2008itis
increasedto122.82anditisalsomaintainedintheyear2009andin2011itisnill.

53

Finishedgoods(atclosingstock):

YEAR
2006
2007
2008
2009
2011

AMOUNTOFFINISHEDGOODS
2704.08
6717.44
15019.79
16880.69
7443.66

20000
15000
Amount of
Finished
goods in Lakhs

10000
5000
0
2006

2007 2008 2009 2011

Interpretation:
Theabovegraphshowstheamountoffinishedgoodsatcost.In2006thecostofmaterialis
2704.08rs.Itisincreasedtors6717.44intheyear2007..Itisincreasedintheyear200809
thecostofgoodsisrs1,6880.69andintheyear2011itisdecreasedto7443.66.

54

Stores,spares&consumables(closingstock):

YEAR
2006
2007
2008
2009
2011

AMOUNTOFCOSTOFSTORESANDSPARES
673.25
1628.44
3617.38
3539.05
973.02

200000
150000
100000

Amount of Raw
material
consumed in
Lakhs

50000
0
2006

2007 2008 2009 2011

Interpretation:
Theabovegraphshowstheamountofstoresandsparesatcost.In2006theconsumableisrs
673.25anditishighlyincreasedtors1628.44intheyear2007.Theformmaintainsgoodsin
properwayrs3617.38intheyear2008anditisdecreasedtors3539.05intheyear2009and
intheyear2011itisdecreasedto973.02.

55

Rawmaterialconsumed:

YEAR
2006
2007
2008
2009
2011

AMOUNT
65875.45
68699.73
172305.70
16,9697.36
38607.65

200000
150000
100000

Amount of Raw
material
consumed in
Lakhs

50000
0
2006

2007 2008 2009 2011

Interpretation:
Theabovegraphshowsconsumptionofrawmaterials.Theconsumptionofrawmaterialin
theyear2006isrs65875.45theconsumptionofrawmaterialincreasedintheyear200708in
thers172305.70.AnditisdecreasedtoRs16,969,736,368intheyear2009anditdecreased
toRs3,8607.65intheyear2011.ss

56

Economicorderquantity:
During20062007:
Thefirmrequiresbelowgivenunitsofmaterialformanufacturingofsteel.Thefollowing
arethedetailsoftheiroperationduring20062007.

PARTICULARS
Billets/Blooms

28,889Qty(mt)

Orderingcostper
order
Carryingcost

Rs.2000

Purchasepriceper
unit

400

10%

1.CalculationofEOQ:
Totalunitsrequired(A)=28889
Theorderingcostperorder(O)=Rs.2000
Carryingcostperunit(C)=10%
(i.e.)10%ofRs.400=Rs.40
EOQ

=2AO/C
=2*28889*2000/40
=Rs.1699.67

2.Numberofordersfortheyear=A/EOQ
=2889/1699.67
=16.99~17orders

57

3. Totalannualcost=carryingcost+orderingcost
1=

1445000+34000

2=

Rs.1479000

Carryingcost=ordersize*averageinventory
1 ordersize=A/nooforders
=28889/17

1=

1699.67

2 Averageinventory=ordersize/2
=1700/2
1= Rs.850
2 Carryingcost=1700*S850
1= Rs.1445000
3 Orderingcost=costperorder*nooforders
1= 2000*17
=Rs.34000

58

EOQDURING20072008
Thefirmrequiresbelowgivenunitsofmaterialformanufacturingofsteel.
Thefollowingarethedetailsoftheiroperationduring20072008.

PARTICULARS

Billets/Blooms
Orderingcostperorder
Carryingcost

123596Qty(Mt)
2200
10%

Purchasepriceperunit

Rs420

1.CalculationofEOQ:
Totalunitsrequired(A)=123596mt
Theorderingcostperorder(O)=Rs.2200
Carryingcostperunit(C)=10%
(i.e.)10%ofRs.2000=Rs.42
EOQ=2AO/C
=

2*123596*2200/42

Rs.3598.354

2.Numberofordersfortheyear

3.Totalannualcost=
=
=

=
=
=

A/EOQ
123596/3598.354
34.79~35orders

carryingcost+orderingcost
6245669+77000
Rs.6322669

59

Carryingcost=ordersize
ordersize

averageinventory
=

A/nooforders

123596/35

3531.31

Averageinventory =
1=
2=

ordersize/2
3531.1/2
Rs.1768.655

Carryingcost=
1=

Orderingcost=

3531.31*1768.655
Rs.6245669

costperordernooforders

1=

2200*35

2=

Rs.77000

60

EOQDURING20082009
Thefirmrequiresbelowgivenunitsofmaterialformanufacturingofsteel.The
followingarethedetailsoftheiroperationduring20082009.

PARTICULARS
Billets/Blooms
Orderingcostperorder
Carryingcost
Purchasepriceperunit

106,066,Qty(Mt)
Rs2400
10%
Rs440

CalculationofEOQ:
Totalunitsrequired(A)=106066mt
Theorderingcostperorder(O)=Rs.2400
Carryingcostperunit(C)=10%
(i.e.)10%ofRs.2000=Rs.44
EOQ

=2AO/C
=2*106066*
2400/44=Rs.3401.59

Numberofordersfortheyear=A/EOQ
=106066/3401.59
=31.18~32orders

Totalannualcost=carryingcost+orderingcost
1=

5.493154+76800

2=

Rs.5569954

61

Carryingcost=ordersize*averageinventory
Ordersize

A/nooforders

=
=

106066/33/2
3314.56

Averageinventory

=
=
=

ordersize/2
3314.56/2
Rs.1657.28

Carryingcost

=
=

3314.56*1657.28
Rs.5493154

Orderingcost

=
=
=

costperorder*nooforders
2400*32
Rs.76800

62

EOQDURING20092011
Thefirmrequiresbelowgivenunitsofmaterialformanufacturingofsteel.The
followingarethedetailsoftheiroperationduring20092011.

PARTICULARS
Billets/Blooms

184,661

Orderingcostperorder
Carryingcost
Purchasepriceperunit

3000
12%
Rs500

CalculationofEOQ:
Totalunitsrequired(A)=184,661mt
Theorderingcostperorder(O)=Rs.3000
Carryingcostperunit(C)=12%
(i.e.)12%ofRs.500=Rs.50
EOQ

=2AO/C
1=
2*184,661*3000/50
2=
Rs.4,707.37

Numberofordersfortheyear =

A/EOQ
1=
1=

Totalannualcost =

184661/4707.37
39.23~39orders

carryingcost+orderingcost
1=
2=

11209639+117000
Rs.11326639.

63

Carryingcost=ordersize*averageinventory
Ordersize

=
1=
2=

A/nooforders
184661/39
4734.90

Averageinventory=

ordersize/2

1=

4734.90/2

2=

Rs.2367.45

Carryingcost=
1=

4734.90*2367.45
Rs.11209639

2 Orderingcost=costperorder*nooforders
1=

3000*39

2=

Rs.117000

64

VEDANALYSIS
VitalEssentialandDesirableanalysisisdonemainlyforcontrolofsparepartskeeping
inviewofthecriticalitytoproduction.
Vitalsparesaresparethestockoutofwhichevenforashorttimewillstopproduction
forquitesometime.Essentialsparesaresparestheabsenceofwhichcannotbetoleratedfor
morethanafewhoursaday.Desirablesparearethose,whichareneeded,buttheirabsence
forevenaweekorsowillleadtostoppageofproduction.

MATERIAL
10%

CLASS
A

VALUE
70%

20%

20%

70%

10%

PRIORITY
V
10%
E
20%
D
70%
V
10%
E
20%
D
70%
V
10%
E
20%
D
70%

MATERIAL
70%
10%
10%
70%
20%
10%
70%
20%
10%

65

THEREORDERLEVEL
Thereorderlevelisthelevelofinventoryatwhichthefreshorderforthatitemmust
beplacedtoprocurefreshsupply.Thereorderleveldependsupon.

1. Lengthoftimebetweentheplacementofanorderandreceivingthesupply.
2. Theusagerateoftheitem.Theinventoryisconstantlybeingusedup.Therateatwhichthe
inventoryisbeingusedup.Therateatwhichtheinventoryisbeingusedupiscalledthe
usagerate.

Thereorderlevelcanbedeterminedasfollows:

R=M+TU
R=Reorderlevel
M=Minimumlevelofinventory
T=timegap/deliverytime
U=UsageRate
Thereorderlevelandinventorypatternshavebeshownasfollows:
Thefigureshowsthatiftheusagerateisconstant,theorderaremadeatevenintervalsfor
thesameamountseachtimeandtheinventorygoestozerojustbeforeanorderisreceived.

Safetystock:
Thesafetystockprotectsfirmfromtradeoffsduetounanticipateddemandfortheitemslevel
ofinventoryinvestmentsishoweverincreasedbytheamountofsafetystock.Safetylevelis
ascertainedininventoryasapartbecausethereisalwaysanuncertainlyinvolvedintimelag
usagerateorotherfactors.
Usually smaller the safety level greater the risk of stock outs. If stock levels are
predictablethenthereisachanceofstockoutoccurring.Howeverstockinflowsandoutflows
are unpredictable or lesser predictable it becomes to carry additional safety to prevent
unexpectedstockoutssousagerateisestimatedifcostislowthennosafetystockisneeded.

JustInInventory:
TheBasicconceptisthateveryfirmshouldkeepaminimumlevelofinventoryonhand,relying
supplierstofurnishjustintimeasandwhenrequired.JIThelpsinemphasizingsufficientlevelof
stocktoensurethatproductionwillnotbeinterrupted.Althoughthelargeinventoriesmaybehad
ideaduetoheavycarryingJITisamodernapproachtoinventorymanagementandthegoalis
essentiallytominimizesuchinventoriesandtherebymaximizingturnover.

JITsystemsignificantlyreducesinventorycarryingcostberequiringthattherawmaterial
beprocuredjustintimetobeplacedintoproduction.Additionallytheworkinprocessinventory
isminimizedbyeliminatinginventorybuffersbetweendifferentproductiondepartments.

66

IfJITistobeimplementedsuccessfullytheremustbeahighdegreeofcoordinationandco
operationbetweenthesupplierandmanufacturerandamongdifferentproductioncenters.JIT
does not appear to have any relation with EOQ however it is in fact alters some of the
assumptionsofEOQmodel.TheaverageinventorylevelundertheEOQmodelisdefinedas
Averageinventory=1/2EOQ+safetylevelJITattacksthisequationintwoways.

1 Byreducingtheordercost.
2 Byreducingthesafetystock
ThebasicphilosophyinJITisthatbenefits,associatedwithreducinginventoryand
deliverytimetoabareminimumthroughadjustmentiEOQmodel,willmorethanoffsetthe
costsassociatedwiththeincreasedpossibilityofstockouts.

67

InventoryTurnoverRatio
Whatitis
This ratio is often a firms inventory turns over during the course of the year. Because
inventories are the least liquid form of assets, a high inventory turnover ratio is generally
positive.Ontheotherhand,andusuallyhighratiocomparedtotheaveragefortheindustry
couldmeanabusinessislosingsalesbecauseofinadequatestockonhand.

Whentouseit
Ifafirmsbusinesshassignificantassetstiedupininventory,trackingitsturnoveriscriticalto
successful planning. If inventory is turning too slowly, it could indicate that is may be
hamperingthefirmscashflow.
Becausethisratiojudgesannualinventoryturns,itisusuallyconductedonceayear.

Theformula:

costofgoodssold
Averagevalueofinventory

YEAR COST
SOLD

OFGOODS

2006

70340.33

AVGVALUE
OF
INVENTORY
4076.86

INVENTORY
TURNOVER
RATIO
17.25

2007

75687.45

4800.64

15.76

2008

184082.21

12583.99

14.63

2009
2011

190053.62
419760.92

16067.13
10185.20

11.83
41.21

68

RAWMATERIALCONSUMED:

60
40
20
0
2006 2007 2008 2009 2011

Interpretation:
Theabovegraphshowsinventoryturnoverratiooftheform.Theratiocanbecontinuously
decreasedfromtheyear200609.Theturnoverratiooftheformis17.25intheyear2006.The
decreasedturnovershowsgoodconsumptionofrawmaterial.Theratiowillbedecreasedto11.83
intheyear2009butitisincreasedintheyear2011is41.21.

STOCKLEVELS
During20062007
Thecompanyrequires28889unitsofbillets/bloomstomanufactureofsteelfortheyear
200607.EOQis1700units.Thecompanymakessafetystockequalto30dayrequirementand
thenormalleadtimeis1020days.Thecompanyworksfor300daysinayear.
a.Reorderlevel=

leadtime*Averageusage+safetystock

1=

(10*96.29)+2888.9

2=

3851.9
usage*periodofsafetystock/totalworkingdaysinayear

Safetystock =

1=

28889*30/300

2=

2888.9
usage/totalworkingdaysinayear

Averageusage=

1=

28889/300

1=

96.29

b.Minimumstocklevel=

reorderlevel(Averageusage*Averageleadtime)

1=

3851.9(96.29*10+20/2)

2=

2408

3. Maximumstocklevel=reorderlevel+reorderingquantity
(Minimumusage*minimumleadtime)

d.Dangerlevel
purchases

1=

3851.9+1700(96.29*10)

2=

5551.9962.9

3=

4589

Averageusage*Maximumreorderperiodforemergency

1= 96.29*20
2= 1925.8
e.Averagestocklevel =

1=
2=

(Minimumstocklevel+Maximumstocklevel)
2408+4589/2
3496

70

During20072008
Thecompanyrequires123596unitsofbillets/bloomstomanufactureofsteelfortheyear
200708.EOQis3335units.Thecompanymakessafetystockequalto30dayrequirementand
thenormalleadtimeis1020days.Thecompanyworksfor300daysinayear.
a.Reorderlevel

leadtime*Averageusage+safetystock

1=

(10*412)+12360

2=
Safetystock

1=
2=
Averageusage =

16480
usage*periodofsafetystock/totalworkingdaysinayear

123596*30/300
12360
usage/totalworkingdaysinayear

1=

123596/300

1=

412

b.Minimumstocklevel

reorderlevel(Averageusage*Averageleadtime)

c.Maximumstocklevel

d.Dangerlevel

16480(412*10+20/2)

10300

reorderlevel+reorderingquantity
(Minimumusage*minimumleadtime)

16480+3335(412*10)

198154120

15695

=Averageusage*Maximumreorderperiodforemergencypurchases

1=

412*20

2=

8240

e.Averagestocklevel

(Minimumstocklevel+Maximumstocklevel)

1=

10300+15695/2

2=

13000

71

During20082009
Thecompanyrequires106066unitsofbillets/bloomstomanufactureofsteelfortheyear
200809.EOQis3257units.Thecompanymakessafetystockequalto30dayrequirementand
thenormalleadtimeis1020days.Thecompanyworksfor300daysinayear.
a.Reorderlevel =

1=

leadtime*Averageusage+safetystock

(10*354)+10606.6

2= 141476
Safetystock =

usage*periodofsafetystock/totalworkingdaysinayear

1= 106066*30/300
2= 10606.6
Averageusage=

usage/totalworkingdaysinayear

106066/300

354

b.Minimumstocklevel

reorderlevel(Averageusage*Averageleadtime)
=

=
c.Maximumstocklevel

8837

reorderlevel+reorderingquantity
(Minimumusage*minimumleadtime)

14147+3257(354*10)
=

d.Dangerlevel

14147(354*10+20/2)

13864

=Averageusage*Maximumreorderperiodforemergencypurchases

1=
2=
e.Averagestocklevel

354*20

708
=

(Minimumstocklevel+Maximumstocklevel)

1=

8837+13864/2

2=

11350

72

During20092011
Thecompanyrequires184661unitsofbillets/bloomstomanufactureofsteelfortheyear
200911.EOQis6155units.Thecompanymakessafetystockequalto30dayrequirementand
thenormalleadtimeis1020days.Thecompanyworksfor300daysinayear.
a.Reorderlevel

Safetystock

Averageusage

leadtime*Averageusage+safetystock

(10*615.53)+18466.1

24621.4

usage*periodofsafetystock/totalworkingdaysinayear

184661*30/300

18466.1

usage/totalworkingdaysinayear

b.Minimumstocklevel

c.Maximumstocklevel

d.Dangerlevel

e.Averagestocklevel

184661/300

615.53

reorderlevel(Averageusage*Averageleadtime)

24621.4(615.53*10+20/2)

15389

reorderlevel+reorderingquantity
(Minimumusage*minimumleadtime)

24621.4+6155(615.53*10)

24521.1

= Averageusage*Maximumreorderperiodforemergencypurchases
=

615.53*20

12310.6
=

(Minimumstocklevel+Maximumstocklevel)

1=

15389+24521.1/2

2=

27649.55

73

CHAPTERV

FINDINGS&SUGGESTIONS
Thecompanyishavinggoodsalesfortheirproductsduringalltheyearsofthestudy.
Theinventoryturnoverratioisonadecliningtrendyearafteryearintheperiodofthe
study.Itindicatesinefficiencyofmanagementinturningoftheirinventoryintosales.
Thecompanyshouldadoptsophisticatedtechniquestomanageitsinventoryina
bettermanner.
TheEOQcalculatedissuggestingthatthecompanyshouldobtainitsinventoryrequirements
byplacingordersfrequentlytoitssuppliersratherthanonetimereplenishment.

Companyshouldtakemeasuresformaintenanceofproperstoresandsparessoastoavoid
thefrequentbreakdownofthemachinery.
Thereisaneedtodevelopgoodcommunicationsystembetweenvariousdepartments
likemarketing,planning,procurement,andproductionanddistributionsfunctions.
The company should follows JustinTime technique, their by it can do away with
waitingtimeforareceiptofmaterials.

74

CONCLUSION

Inventorymanagementhastodowithkeepingaccuraterecordsoffinishedgoodsthatare
readyforshipment.Thisoftenmeanspostingtheproductionofnewlycompletedgoodstothe
inventorytotalsaswellassubtractingthemostrecentshipmentsoffinishedgoodstobuyers.When
thecompanyhasareturnpolicyinplace,thereisusuallyasubcategorycontainedinthefinished
goodsinventorytoaccountforanyreturnedgoodsthatarereclassifiedorsecondgradequality.
Accuratelymaintainingfiguresonthefinishedgoodsinventorymakesitpossibletoquicklyconvey
informationtosalespersonnelastowhatisavailableandreadyforshipmentatanygiventime.

Inventorymanagementisimportantforkeepingcostsdown,whilemeetingregulation.Supply
anddemandisadelicatebalance,andinventorymanagementhopestoensurethatthebalanceis
undisturbed.HighlytrainedInventorymanagementandhighqualitysoftwarewillhelpmake
Inventorymanagementasuccess.TheROIofInventorymanagementwillbeseenintheforms
ofincreasedrevenueandprofits,positiveemployeeatmosphere,andonoverallincreaseof
customersatisfaction.

75

BIBLIOGRAPHY
Referredfollowingstandardtextandwebsites:
FinancialManagement
FinancialManagement
FinancialManagement

.I.M.Pandey
.PrasannaChandra

.VanHorn
ManagementAccountingandControl
.S.N.Maheswari
FinancialManagement
.KhanandJain
Website:
WWW.SUJANNA.COM
WWW.FINANCIALMANAGEMENT.COM
WWW.PRICIPALSOFACCOUNTING.COM