INTRODUCTION TO THE PROJECT AT ECIL

Inventory management in public sector undertaking assumes lot of significance. This is more

complex, when there are number of product divisions & less common items of inventory.

It is observed that, some PSU’s are loaded with high volumes of inventory leading to obsolescence

with consequent charging to profit/loss A/c liquidity while resulting in blockage of funds three by

drastically affecting the performance of the organization. In case of ECIL, there is variety of projects

of high tech nature not similar to each other. Inventory management, hence is challenge task.

In the backdrop of above, it is proposed to take a project study on inventory management in a leading

public sector – ELECTRONIC CORPORATION OF INDIA LIMITED. (Under government of

India). The above study is aimed at analyzing the inventory management practices prevalent in ECIL.

In this context it is proposed to take project study in reputed public sector undertaking covering

inventory management’s aspect and giving suggestions for implementing any. ECIL is chosen as it is

a central public sector unit of long standing having diversified product portfolio with variety of

material inventory having control complications. The project study aims to analyze, discuss, conclude

and suggest measures for further controls.

The project is designed to provide an introduction to the study of INVENTORY MANAGEMENT

in ECIL. An attempt is made to explain about inventory management & various techniques.
Objectives of the study

1. To take a project study on inventory management in a leading public sector – ELECTRONIC

CORPORATION OF INDIA LIMITED. The above study is aimed at analyzing the inventory

management practices prevalent in ECIL.

2. To be followed by critical analysis & assessment of performance at ECIL.

3. To analyze the performance, the focus is on application of standard measurement tool like

turnover ratios etc., to trend analysis and structural analysis of the company.

4. To analyze Inventory Management practices at ECIL through Ratio Analysis.

5. To sum up providing conclusions and make suggestions for improvement on Inventory

Management practices at ECIL.

Need for the study

The investment in Inventory is very high in most of the under talking engaged in manufacturing

wholesale and retail trade. The amount of investment is sometimes more in inventory than in other

assets.

In India a study of 29 major industries has revealed that the average cost of materials is

64 paisa and the cost of labor and overheads is 36 paisa of a rupee. About 90% of working capital is

invested in inventories. The main reason attributed for loss making financial indiscipline in managing

the resources particularly in inventory management for an organization, the product profitability

considering standards and budgets is of paramount importance needless to say that in this context,

inventory management assumes lot of significances.

Inventory management determines and portrays the following factors like what to

purchase, where to purchase, how to purchase, from where to purchase, where to store etc. will be

critical factor hence it becomes a crucial factors to undergo a detailed analysis to find an efficient

system of inventory. As an attempt has been made to study the inventory management with reference

to ECIL.
Research Methodology

Any of the systematic and scientific research lies in its methodology giving a clear idea of the forms

of study and procedure adopted in conducting it and starting the purpose become essential parts of

every study.

So, in this study the information furnished has been collected in two ways one is primary source and

one is secondary source.

Primary source:

Primary data has been collected by interacting with the guide and other supportive through direct

personnel, oral investigation, seminars, classroom lectures delivered about Inventory management in

ECIL.

Secondary Data:

Secondary data is collected from Annual reports of the units, other reports of the unit, House

magazines of the units, Internet.

Scope of the study:

 Project covers 2002-2003 to 2008-2009 financial years. Data/ information is collects for the

above financial years.

 The project report on inventory management covers collections of data, analysis of data

interpretations and suggestions. Inventory statements are prepared on the basis of the financial

statements of ECIL.

Limitations of the study

 As stated elsewhere, ECIL is under a strategic ministry of government of India dealing with

nuclear power, defense etc.

 The very nature of the organization places certain limitations on the collection of the data &

analysis thereof.

 It’s not possible to collect total information.

 This has bearing to some extent on the project work.

 COMPANY PROFILE

ELECTRONIC CORPORATION OF INDIA LIMITED.

“Let us work up the embers of national pride latest in all of us and build up our Morale so

that we can confidently aim high and achieve greater goals”-

Dr. AS Rao – Founder C & MD of ECIL.

Many industries require electronics in their production process. Electronics is assuming

increasing importance in the monitoring & control of production process of many industries like

engineering, chemical & metallurgical industries. In India, the electronics industry has been taken

many strides both in public & private sectors.

In the field of industrial electronics, the government of India has taken initiations in 1960’s to

set up an industrial unit in public sector in order to produce industrial electronic systems with

indigenous technology to meet the nation’s requirement in strategic areas.

It has vital role to play in the fields of atomic energy, communication, defense, education, space

technology & entertainment. Because of its dynamic character, its pervasive nature & its significant

impact on science, industry & society, electronics is the vanguard of the technological process.

Technological process & obsolescence are both very rapid in this field.
 An intense promotional effort relating to both production & research development is an

important requisite. Therefore, it is essential to ensure a rapid growth in this field. In this direction,

government of India & its agencies with the aim of developing & promoting industrial electronics

system with indigenous know-how, to attain self-sufficiency in atomic energy programmers, started

ELECTRONICS CORPORATION OF INDIA LIMITED on 11th April, 1967.

ECIL was setup under the Department of Atomic Energy in the year 1967 with a view to

generating a strong indigenous capability in the field of professional grade electronics. The initial

accent was on total self-reliance and ECIL was engaged in the Design Development, Manufacture and

Marketing of several products emphasis on three technology lines viz. Computers, Control Systems

and Communications. Over the years, ECIL pioneered the development of various complex

electronics products without any external technological help and scored several 'firsts' in these fields

prominent among them being country's

First Digital Computer

First Solid State TV

First Control & Instrumentation for Nuclear Power Plants

First Earth Station Antenna

 The company played a very significant role in the training and growth of high caliber technical

and managerial manpower especially in the fields of Computers and Information Technology.

Though the initial thrust was on meeting the Control & Instrumentation requirements of the Nuclear

Power Program, the expanded scope of self-reliance pursued by ECIL enabled the company to

develop various products to cater to the needs of Defense, Civil Aviation, Information &

Broadcasting, Telecommunications, Insurance, Banking, Police, and Para-Military Forces, Oil & Gas,

Power, Space Education, Health, Agriculture, Steel and Coal sectors and various user departments in

the Government domain. ECIL thus evolved as a multi-product company serving multiple sectors of

Indian economy with emphasis on import of country substitution and development of products &

services that are of economic and strategic significance to the country.

Electronics Corporation of India Limited (ECIL); a spin of BABA ATOMIC RESEARCH

CENTER (B.A.RC), was incorporated in 1987. The company is under the administrative control of

the Department of Atomic Energy (DAE).

The main objective of ECIL was to support the DAE by manufacturing electronic instruments

& systems, components, control panels & equipment for country’s nuclear programme. The emphasis

has all along been in self-reliance & indigenization in the chosen technical fonts, supported by

collaboration with global players on selective based over the past three decades. The company has

diversified its operations into other fields, such as, computers, communication for other sectors such

as oil & gas energy, telecom, civil aviation & defense

 Comparing last few years the position of the company, has been increasing. As per the

current information, the company has taken up lots of changes as well as improvements in their

profits.

The year 1996-97 has been another difficult year for the company. Production of Rs. 292.12

Crores & income (gross) of Rs. 356.03 Crores could be achieved during the year as compared to the

production & income of Rs. 320.65 Crores & Rs. 360.55 Crores respectively for the previous year.

While the company could record profitable results throughout the 8 th plan period (92-97), the

same could not be sustained in the year 1997-98, which turned out to be difficult year both in terms of

growth & profitability.

The year 1998-99 has been an exceptionally difficult on for the company due to various

extraneous reasons beyond control. The company was confronted with constraints in procurement of

certain custom-built components from foreign sources which affected execution of order around Rs.

60 Crores, which were included in the year’s production schedule.

Consequently, the company could achieve a production of Rs. 237.86 Crores only as

against a target of Rs. 380 Crores & Rs. 310.53 Crores achieved in the previous year. Similarly, the

income for the year worked out to be Rs. 256.94 Crores as compared to Rs. 347.85 Crores achieved in

the previous year. This huge shortfall in unprecedented figures for production & income in the

previous year were Rs. 226.64 Crores respectively.

 The continued commitment to achieve a profitable growth & the associated step

initiated by the company resulted in consolidation of the turnover process, during the year 2000-01.

The performance shows 25% growth over the previous year in both production & income fronts. The

company recorded an impressive growth & crossed of Rs. 500 Crores mark by achieving a production

of Rs. 505.41 Crores, an achievement of 104% against the target of Rs. 485 Crores.

The financial results for the year indicate a Net Profit of Rs. 1209 Crores, which is the

highest ever posted by the company in its history. The turnaround achievement in 2000-01 was

further strengthened by a 20% growth achieved a turnover for the second year in succession. Against

a target of Rs. 580 Crores, the company achieved a turnover of Rs. 681 Crores. The company made

pre-tax profit of Rs. 79.34 Crores compared to 12.09 Crores achieved in 2000-2001. All the

accumulated losses of the company are wiped.

Out of a reserve of Rs. 20.53 Crores is created. The company redeemed all its loans

and is a debt free company, as on 31-03-2002.

During the year, the company registered an impressive growth by reaching a turnover

Rs. 1010 Crores against a target of Rs. 655 Crores, implying growth rate of 48% over the previous

year. The financial results indicate a pre-tax profit of Rs. 80.58 Crores after making a provision of 01-

01-1997 to 31-12-2000, as compared to Rs. 79.34 Crores, during the year 2001-2002.
The company is organized into the following business divisions & their principal

Products are as follows:

1. Instrument & System Division (ISD):

Nuclear Industrial & Analytical Instruments, Security System Comprising CCTV, Fire Alarm

& x ray baggage inspection system, electronic energy meters, special systems for defense,

fiber optic based system & card access systems.

2. Servo Systems Division (SSD):

Precision servo systems for applications in defense & railways.

3. Communication System Division (CND):

Radio communication systems comprising of HF/VHF/UHF trans-receiver, catering to the

needs of Army, Navy, Air Force & Air Traffic Control, Satellite TV Receiver only systems

for B Sector, Special MW computers & electronic warfare systems.

4. Strategic Electronic Division (SED):

Special Defense Products

5. Telecom Division (TCD):

Telecommunication Equipment like switching products, transmission products, access

products & telecom administration products.

6. Antenna Products Division (APD): Design, Manufacture & commissioning of various types of

antenna system & turkey SATCOM network projects.

7. Supervision Control & Data Acquisition Division (SCDAD):

The supervisory systems, supervisory control & automatic projects & industrial control.
8. Business System Division (BSD):

Computer Hardware products & large networking system.

9. Software Consultancy Division (SCD):

Software Consultancy Services

10. Components Division (CD):

Hybrid Micro-Circuits, Semi-Conductor Components, Ceramic Components,

Potentiometers, Tantalum Capacitors, Thermal Batteries, Printed Circuit Boards.

11. Special Products Division (SPD):

Various Time Fuses & other types for Army & Navy.

12. Control & Automation Divisions (CAD):

Simulators for thermal & nuclear power plant, data acquisition systems, control &

instrumentation equipment for nuclear & thermal power plant, operator information systems.

13. Customer Support Division (CSD):

Spares & maintenance services for computers.

14. Industrial Control & Consumer Electronics Group (ICG):

15. Computer Education Division (CED):

16. IT Education Services:

The business groups are supported by corporate facilities like standards & quality assurance,

corporate R&D, personnel & finance and accounts. Over the year, company has acquired &

maintained the following infrastructure facilities:

 STANDARD COLLABORATION LABORATORY:

 Antenna Test Range

 ASIC/VLSI Design Facility

 Wide variety of computing environment

 Country wide network for service support

 Antenna Spinning Facility

All the businesses of ECIL have obtained ISO 9001 certification for design &

manufacture of thick film resistors & hybrid micro circuits in June 1995. Control Systems

group has achieved ISO 9001 certification for design, manufacture, supply, installation

instrumentation systems in August 1995. Other business groups have taken steps to apply

for ISO 9000 quality system certification.

Broadly, the present range of ECIL is as follows:

1. Computer & IT

 Software Products

 Parallel Processing Systems

 LAN Solutions

 EDP Packages

 Computer Hardware
2. Radio Communication

 Micro Wave Components

 VHF Radio Equipments

 Multi-Access Rural Radio

3. Instruments

 Analytical Systems

 Integrated Security

 Nuclear & Nuclear Industrial Systems

4. Antenna Products

 Earth Station Antenna

 V-SAT Products

 Satellite Earth Station

 Line of Sight(LOS) Antenna

5. Fuse Products for Antenna

 Fuse Products for defense

 Tantalum Capacitors & Potential Meters

  Hybrids

6. Telecom

 Telephone Billing Systems

 Max Electronic Exchange

 Special Tele-Equipment

 Message Switching Systems

7. Strategic Electronics

 Tank Communication Products

 Air-Traffic Control Display Systems

 Dependent Surveillance System

8. Electronic Warfare(EW) Products

9. Others

 Control & Automation

 Process Control DSC Systems

 DAS & SCADA

 Energy Management Systems

  Fiber Optic Communication System for Railway Signaling

ECIL BRANCHES
MISSION OF ECIL

ECIL’s mission is to consolidate its status as a valued national asset in the area of strategic

electronics with specific focus on atomic energy, defense, security & such critical sectors of national

importance.

In the context of inventory management, the firm is faced with the problem of meeting two

conflicting needs. To maintain a large size of inventory for efficient & smooth production & sales

operations. To maintain a minimum investment in inventories to maximize profitability.

Both excessive & inadequate inventories are not desirable. These are two danger points with

in which the firm should operate. The objective of inventory management should be to determine &

maintain optimum level of investment. The optimum level of inventory will lie between the two

danger points of excessive & inadequate inventories.

The firm should always avoid a situation of over investment or under investment in

inventories. The major dangers of over investment are:

• Unnecessary tie-up of the firm’s funds & loss of profit

• Excessive carrying costs

• Risk of Liquidity
 The excessive level of inventories consumes funds of the firm, which cannot be used for any

other purpose & thus, it involves an opportunity cost. The carrying costs, such as the cost of

storage, handling, insurance, recording & inspection also increase in proportion to the volume

of inventory.

OBJECTIVES OF THE ECIL:

 To continue services to the country’s needs for the peaceful uses, Atomic Energy, Special &

Strategic requirements of defense & space, electronics security systems & supports for civil

aviation sector.

 To establish newer technology products such as container scanning systems & explosive

detectors.

 To explore new avenues of business & work for growth in strategic sectors, in addition to

working for realizing technological solutions for the benefit of society in areas like

Agriculture, Education, Health, Power, Transportation, Food, Disaster Management etc.,

 To progressively improve share holder’s value in the company.

 To strengthen the technology base, enhance skill base & ensure succession planning in the

company.

 To re-engineer the company to become nationally & internationally competitive, by paying

particular attention to deliver, cost & quality in all its activities.

 To consciously work for finding export markets for the company’s products.
ACHIEVEMENTS, AWARDS AND FELICITATIONS:

As a recognition of the incredible turn around achieved and for its pioneering contribution in the field

of R&D, the company received a number of awards, most prominent of them are:

 “PADMA BHUSHAN” award (1972) to Ayyagari Sambhashiva Rao, a recognition given to

personalities of great national stature, when he was then chairman and managing director of

ECIL and director of atomic energy commission.

 Dr. A. S. Rao has been felicitated as “Electronics man of venture” in the year 2001.

 ECIL received national award for “excellence in the electronics” in 2003.

 SCOPE (Standard Conference of Public Enterprises) award for excellence and outstanding

contribution to public sector management.

 Certificate of merit for “excellence in MOU” performance, from the ministry of heavy

industries.
 INDUSTRY PROFILE

The ELECTRONIC INDUSTRY is supported by the supply of raw materials from the petrochemical

industry, without which it may grind to a halt. The petrochemical industry is an aid to many of the

end-use product industries. It is one of the major supplier of number of basic materials which is used

by different other industries to manufacture their products. It has become one of the major sources of

growth for the economy.

The fastest growing sector is the it and electronic industry sector. The hardware components

serve as an important support to this stupendous growth. The growth of this sector heavily depends on

the supply of various intermediary products. The electronic industry will not be able to perform

without the components from the petrochemical industry. The intermediary products assure better

electrical insulation and safety, feasibility in assembling, better design, and a superb capacity of data-

storage, and reduction of mass of components.

It is due to petrochemicals that the electronic industry has grown by leaps and bounds in the previous

decade. the progress in the communication technology is the result of the improvements in the

hardware devices such as radios, television sets, telephones, computers, CD players, DVD players,

digital cameras, mobile phones, laptops, palmtops, etc. the circuitry of every electronic device is its
most vital element. the circuitry mainly consists of micro processors, integrated circuits, printed

circuits, and connectors - all derived from base materials of petrochemical products. Even the

assembly and the housings are made out of styrene plastics. Many of the cleansers used for cleaning

the contact pins and lenses of the optical drives are based on petrochemical products.

The electronics industry in India took off around 1965 with an orientation towards space

and defense technologies. This was rigidly controlled and initiated by the government. This was

followed by developments in consumer electronics mainly with transistor radios, black & white TV,

calculators and other audio products. Color televisions soon followed. In 1982-a significant year in

the history of television in India - the government allowed thousands of color TV sets to be imported

into the country to coincide with the broadcast of Asian games in New Delhi. 1985 saw the advent of

computers and telephone exchanges, which were succeeded by digital exchanges in 1988. The period

between 1984 and 1990 was the golden period for electronics during which the industry witnessed

continuous and rapid growth.

Current scenario

In recent years the electronic industry is growing at a brisk pace. It is currently worth $10 billion but

according to estimates, has the potential to reach $ 40 billion by 2010. The largest segment is the

consumer electronics segment. While is largest export segment is of components.

INVENTORY MANAGEMENT

Meaning of inventory management:

“The term inventory refers to the stockpile of the products a firm is offering for sale and the

components that make up the product”. In other words, inventory management is composed of assets

that will be sold in future in the normal course of business operations

Inventories are a component of the firm’s working capital & as such, represent a

current accounting cycle, which is normally one year.

1. Current Asset: It is assumed that inventories will be converted to cash in the current

accounting cycle, which is normally one year.

2. Level of Liquidity: Inventories are viewed as a source of cash. For most products, this

description is accurate, at the same time most firms hold some slow moving items that may

not be sold for a long time. With economic slow-downs or changes in the markets for goods,

the prospects for sale of entire product lines diminished. In these cases, the liquidity aspects of
 inventories become highly important to the manager of working capital. At the minimum, the

analyst must recognize that inventories are the least liquid of the current assets.

3. Liquidly Gases: Inventories are tied to the firm’s pool of the working capital in a process that

involves three specific lags.

• Creation Lags: In most cases, inventories are purchased on credit, creating an account

payable. When the raw materials are processed in the factory, the case to pay

production expenses is transferred at future times. Whether manufactured or

purchased, the firm’s will hold inventories for some period before payment is made.

This liquidity lag offers a benefit to the firm.

• Storage Lags: Once goods are available for resale, they will not be immediately

converted into cash. First, the items must be sold evenly. When sales are moving

briskly, a firm will hold inventory as a backup. Thus the firm will pay suppliers,

workers & overhead expenses, before the goods are actually sold. This lag represents a

cost to the firm.

• Sale Lag: Once the goods have been sold, they normally do not create cash

immediately. Most sales occur on credit & become accounts receivable. This lag also

represents a cost to the firm.

4. Circulating Activity: Inventories are in rotating pattern with other current asset. They get

converted into receivables which generate cash. Cash is invested again in inventory, to

continue the operating cycle.

NATURE OF INVENTORIES

Inventories are stocks of the product, a company is manufacturing for sale & components

that make up product. The various forms in which inventories exist in a manufacturing company are:

Raw Materials, Work-in-Progress & Finished Goods.

1. Raw Material Inventory: This consists of basic materials that have not yet been committed

to production in a manufacturing firm. The purpose of maintaining raw material inventory is

to uncouple the production functions, so that, delay in shipment of raw materials do not cause

production delay.

2. Work-in-Progress Inventory: This category includes those materials that have been

committed to the production process but have not been completed. The quantity & the value

of work-in-progress depend on the length of the production cycle. In case, the production

cycle is lengthy, the firm will be having a large work-in-progress. The more complex &

lengthy, the production process, the larger the investment in work-in-progress inventory.

3. Finished Goods Inventory: These are the goods that are either being purchased by the firm

or produced or processed in the firm. These goods are just ready from sale to customers.

Inventories of finished goods arise because of the time involved in production process & the

need to meet customers demand promptly.

Cycle of inventories:
NEED TO HOLD INVENTORY

Maintaining inventories involves tying-up of the company’s funds & incurrence of

storage & handling costs. There are three general motives for holding inventories:

1. Transactionary Motive: Every firm has to maintain some level of inventory to meet the day-

to-day requirements of sale, production process, customer demand etc. Transaction motive

makes the firm to keep the inventory will provide smoothness to the operations of the firm. A

business firm exists for business transactions that require stock of goods & raw materials.

2. Precautionary Motive: A firm should keep some inventory for unforeseen circumstances

also. The firm must have inventories of raw materials as well as finished goods, for meeting

any emergencies.

3. Speculative Motive : The firm may be tempted to keep some inventory in order to capitalize

an opportunity to make profit e.g., sufficient level of inventory may help the firm to earn extra

profit, in case of expecting shortage in the market.

 MAIN PURPOSE OF INVENTORY

The purpose of holding inventory is to allow the firm to operate the processes of purchasing,

manufacturing & marketing, in its primary products..

1. Avoiding Loss Sales: Without goods on hand that are ready to be sold most firms would lose

business. Some customers are ready to wait, particularly, when an item must be made on order

or is not widely available from competitors. A firm must be prepared to deliver goods on

demand. Shelf-Stock refers to items that are stored by the firm & sold with little or no

modifications to the customers.

2. Gaining Quantity Discounts: In turn, for making bulk purchases, many suppliers will reduce

the price of supplies & component parts. These discounts will reduce cost of goods sold &

increase the profits earned.

3. Reducing Order Cost: Each time a firm places an order, it incurs certain costs on goods that

arrive, must be accepted, inspected & counted. Later an invoice must be processed & payment

made. Each of these costs will vary, with the order placed. By placing fewer orders, the firm

will pay less to process each order.

4. Achieving Efficient Production Runs: Each time a firm sets-up workers & machines

produce an item, start-up costs are incurred. These are absorbed, as production begins. The

longer the run, the smaller the costs to begin producing the goods.
5. Reducing Risk of Producing Shortages: Manufacturing firms frequently produce goods with

hundreds or thousands of components. If any of these are missing, entire production operation

can be halted with heavy expenses. To avoid starting a production run & then discovering the

shortage of a vital raw material or other component, the firm can maintain larger inventories.

Basically, inventory management is concern of stores management, production management

& sales management.

ESSENTIALS OF INVENTORY CONTROL

1. There should be proper co-operation & co-ordination among the departments involved in

purchasing, receiving & inspection, storage, sales, production & accounting.

2. Purchase of raw materials should be centralized.

3. There should be proper scheduling of materials.

4. A good method of codification & classification of materials should be followed.

5. There should be proper inspection of materials, when the receiving department receives them.

6. Standard form of requisitions, order, issue, transfer of material from one job to the other &

transfer of material from the job to the stores should be used.

7. The storage of materials should be well planned to avoid losses from theft, carelessness,

damage deterioration, evaporation & pilferages.

8. A good method of issue of materials to various jobs, orders or processes should be followed,

so that, there is delivery of right type of materials to the jobs, orders or processes in the right

quantity, at the right time they are needed.

 9. Perpetual Inventory System of materials should be operated, to facilitate regular checking &

avoiding closing down factory for stock-taking.

10. A system of internal check should be properly authorized by independent persons.

11. Minimum, maximum re-ordering levels for each type of material should be fixed, to ensure

that there is no shortage of materials & that there is no over stock-taking.

12. Ordering quantity for each type of material should also be fixed, to reduce the ordering costs

& carrying costs of materials

13. A careful choice should be made of the method of valuing the materials issue, because it

affects the cost of the jobs or processes & the value of the closing stock of materials in the

stores.

14. Adequate records to control materials during the production process should be maintained, to

ensure that there is minimum possible wastage.

15. Information about availability of materials should be continuously available to the

management, so that planning of production may be done keeping in view the inventory

balances in stores. Information about obsolete & defective stock should also be given to the

management from time to time, so that steps may be taken for the disposal of such stock.

Management of Inventory:

Stores are an important department in any production workshop. Inventories constitute a

major element of total working capital & it is stated that good inventory management is good
management. Inventory management involves large numbers of issues, such as, fixing levels of

inventories, size of inventory to be carried on issue pricing policy, inspection procedure, economic

quantity, storage facilities & effective information system.

OBJECTIVES OF INVENTORY MANAGEMENT

The basic objective of inventory management is to determine & maintain optimum level of

investment in inventories, to achieve the objective investors.

 To have stocks available as & when they are required

 To meet high demand without keeping excess stock

 To utilize available storage space

 To maintain adequate inventory

 To ensure proper safety of materials of production

 To facilitate purchasing economies

 To provide check against loss of materials

 To contribute to profitability

 To bring down various costs associated with inventory to low

  To keep investments in stock at reasonable level, so that there is no loss of interest on capital

FACTORS AFFECTING INVENTORY CONTROL POLICY

The inventory policy of an organization has an impact on the whole system. There are number

of factors which can affect the inventory decisions. These can be broadly divided into the following

categories:

A. Characteristics of the manufacturing system :

1. The nature of the production process: The product design, production planning & plant layout

have significant affect on inventory policy. Some of these factors are :

 Degree of changes in the nature of the product from raw material to final product at various

stages of transformation, viz., final assembly. Assembly & packaging determines the nature of

inventory control operation, e.g., if nature of product remains more or less same at various

stages of production, then production economies can be achieved, by keeping the right balance

of stocks of semi-finished product.

  Process capability & flexibility process capability is characterized by processing time of

various operations, e.g., the replenishment lead-time (length of delay in execution after

issuance of replenishment order) directly influences the size of inventory.

2. The nature of the production system: It is characterized by the number of manufacturing stages

& the inter-relationship between various production operations, e.g., in product-line system, inventory

control is simpler than in job-type system. Similarly when there are many operational stages, then the

inventory control system must provide smooth adjustment of early operating stages & inventories to

fluctuations in finished stock.

B. Amount of protection against shortages :

There is always variation in demand & supply of the product. The protection against such un-

predictable variations can be done by means of buffer stocks. The factors for such variations are:

 Changes in size & frequency of orders: The amount of product sold in large number of

orders of small size can be operated with fewer inventories.

 Un-predictability of sales: If there are too many fluctuations in demand of a product, then

these can be handled only by flexible & large capacity of inventory operations.

 Physical & Economic Structure of distribution pattern: Longer the channel of distribution,

the more is the inventory requirement. Field inventories basically improve service to retailers

by removing some of the burdens of keeping stocks.

  Costs associated with failure to meet demand: When there is heavy penalty on any delay, in

fulfillment of any order, then inventory should be large.

 The accuracy, frequency & detail of demand forecasts: Fluctuation stock exists when

forecasts are not exact. The responsibility of forecasters for inventory needs should be clearly

recognized.

C. Organizational Factors:

There are certain factors which are related to the policies, traditions & environment of any

enterprise. Some of them are:

 Labor relation policies of the organization

 Amount of capital available for stock

 Rate of Return on capital available, if invested elsewhere.

D. Other Factors:

 These are related to the overall business environment of the region, viz., Inflation

 Strike situation in communication facilities

 Wars or some other natural calamities like droughts, floods, tsunami’s etc.,

 Differences between input & output

FUNCTIONS OF INVENTORY MANAGEMENT

 Assessing & stabilizing demand forecast for different kinds of material

 Obtaining & recording correct specification for different items, from the production

department

 Maintaining complete details of all stock items

 Reviewing of all stock items as per a set time-table

 Identifying low-stock & nil-stock items and re-order them

RISKS ASSOCIATED WITH INVENTORIES

 Price decline due to increase in supply & price-cutting through competition

 Production deterioration due to storing for too long period or improper storing

 Obsolescence due to change in customer’s tastes, new production techniques, improvement in

product design, specifications etc.,

PROBLEMS OF INVENTORY MANAGEMENT

 Maintaining a sufficiently large size of efficient & smooth production & sales

 Maintaining minimum investment in inventories to minimize cost & maximize profitability

COSTS ASSOCIATED WITH INVENTORIES

The effective management of inventory involves a trade-off between having too little & too much

inventory. To examine inventory from the cost angle, five categories of costs can be identified,

three are direct costs – that are immediately connected to buying & holding goods and two are

indirect costs – which are losses of revenues that vary with differing inventory management

decisions. The five costs of holding inventories are :

1. Material Costs: These are the costs of purchasing the goods including transportation &

handling costs.

2. Ordering Costs: The term ordering cost is used in the case of raw materials & includes the

entire costs of acquiring raw materials. They include costs incurred in the activities such as

requisitioning, purchase ordering, transporting, receiving, inspecting & storing.Ordering costs

 increase in proportion to the number of orders placed & ordering costs will be relatively small.

Thus, ordering cost decrease with increasing size of inventory.

3. Carrying Costs: These are the expenses of storing goods. Once the goods have been

accepted, they become a part of firm’s inventories. These costs include insurance,

rent/depreciation of warehouse, salaries of store keeper, his assistants & security personnel

etc. Carrying costs are considered to be a given percentage of the value of the inventory held

in the warehouse. Despite some of the fixed elements of costs which comprise only a small

portion of total carrying costs, are considered to be around 25% of the value of the inventory

held in storage.

4. Cost of funds tied up with inventory: When a firm commits its resources to inventory, it is

using the funds that otherwise might be available for other purposes. This is its opportunity

cost.

TOOLS AND TECHNIQUES OF INVENTORY MANGEMENT

Effective inventory management requires an effective control system for

inventories. A proper inventory control not only helps him in solving the acute problem of liquidity

but also increases profits and causes substantial reduction in the working capital of the concern. The

following are the important tools and techniques of inventory management and control:

1. Determination of Stock Levels.

2. Determination of Safety Stocks.

3. Determination of Economic Order Quantity (EOQ).

4. A.B.C.Analysis.
5. V.E.DAnalysis.

6. Inventory Turnover Ratios.

7. Perpetual Inventory System.

8. Inventory Cost Reports.

1. Determination of stock levels:

Carrying of too much and to little of inventories is detrimental to the firm. Therefore, an efficient

inventory management requires that firm should maintain an optimum level of inventory where

inventory costs are the minimum and at a same time there is no stock – out which may result in loss

of sale are stoppage of production. Various stock levels are discussed as such.

(A)Minimum level:

This represents the quantity which much be maintained in hand at all time. If stocks are less

than the minimum level then the work will stop due to shortage of materials. Following

factors are taken into account while fixing minimum stock level :( i) Lead time, (ii) Rate of

consumption and (iii) Nature of raw material.

 Minimum stock level can be calculated with the help of following formula:

Minimum stock level = Re-Ordering level (Normal consumption*Normal Re-Order period).

(B)Re – Ordering level:

When the quantity of materials reaches at a certain figure then fresh order is sent to get

materials again. The order is sent before the material reaches the maximum stock level. The rate

consumption, number of days required to replenish the stocks, and maximum quantity of

materials requires on any day are taken into account while fixing reordering level. Reordering

level is fixed with the following formula:

Re-Ordering level= maximum consumption * maximum Re – Order Period

(C)Maximum level:

It is the quantity of materials beyond which a firm should not exceed its stocks. If the

quantity exceeds maximum level limit then it will be over stocking. A firm should avoid over

stocking because it will result in high materials costs. The following formula uses for calculating

maximum stock level

Maximum stock level = Re – Ordering level + Re – Ordering quantity.

- (Minimum consumption*Minimum Re- Ordering period).

(D)Danger level:
 It is the level beyond which material should not fall in any case. If the danger level arises

then immediate steps should be taken to replenish the stocks even if more cost is incurred in

arranging the materials. Danger level is determined with the following formula

Danger level = Average consumption * maximum Re –Order period for Emergency purchases.

(E)Average stock level:

The average stock level is calculated as

Average stock level = minimum stock level + ½ of Re-Order quantity.

2. Determination of safety stocks:

Safety stock are the minimum additional inventory which serve as a safety

margin to meet an unanticipated increase in usage resulting from unusually high demand and/or an
uncontrollable late receipt of incoming inventory the basic problem is to determined the level of

quantity of safety stocks. To cost are involved in the determination of the stock i.e., opportunity cost

of stock/outs and the carrying costs. The stock outs of raw materials cause production disruption

resulting into higher cost of production. If a firm maintains low level of safety frequent stock outs

will occur resulting into a larger opportunity costs. On the other hand, the larger quantity of safety

stocks involves higher carrying costs.

3. Determination of Economic Order Quantity (EOQ):

The order quantity problem relates to the determination of the quantity of

inventory which order should be ordered. The economic order quantity is that level of inventory order

which minimizes the total cost associated with inventory management. Generally, economic order

quantity is the point at which inventory carrying costs are equal to the 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 costs and Carrying costs.

a. Ordering costs

These are the costs which are associated with the purchasing or ordering of

materials.
b. Carrying costs

These are the costs for holding the inventories. These costs will not be incurred if

inventories are not carried.

Symbolically,
EOQ = 2 DS / C

Where,

D= Annual Demand.

S= cost of placing order.

C= Inventory carrying costs of one unit.

 Annual Cost ($)
High

Minimum
er

Total Annual
Stocking Costs

Total Annual
Stocking Costs
Annual
Carrying Costs
Low

Annual
er

Ordering Costs
Order Quantity
Smaller EOQ Larger

4. A-B-C Analysis:
 The ABC system is a widely-used classification technique to identify various items of

inventory for purpose of inventory control. On the basis of the cost involved, the various items are

classified into three categories viz., A, B and C. (i) A, consisting of items with the large investment,

(ii) C, with relatively small investment but fairly large number of items and (iii) B, which stands mid-

way between category A and C. Category A needs the most rigorous control, C requires minimum

attention and B deserves less attention than A but more than C. The information shown in the

following diagram:

5. V.E.D Analysis: The VED analysis is used generally for spare parts. The requirements and

urgency of spare parts is different from that of materials. The demand for spare parts upon the

performance of the plant and machinery. Spare parts are classified as Vital (V), Essential (E) and

Desirable (D). The vital spare parts are a must for running the concern smoothly and these must be
stored adequately. The essential types of spares are also necessary but their stocks may be kept at low

figures. The stocking of desirable type of spares may be avoided at times. If the lead time of these

spares is less, then stocking of these spares can be avoided.

6. Inventory Turnover Ratios:

Inventory turnover ratios are calculated to indicate whether inventories have been used

efficiently or not. The Inventory Turnover Ratio also known as stock velocity is normally

calculated as sales/average inventory or cost of goods sold/average inventory cost. Inventory

conversion period may also be calculated to find the average time taken for clearing the stocks.

Symbolically,

Inventory Turnover Ratio= Cost of Goods Sold/Average Inventory at cost

(Or)

=Net Sales / (Average) Inventory and

Inventory conversion period= Days in a year / Inventory Turnover Ratio.

7. Perpetual Inventory System:

 The stock taking may either be done annually or continuously. In the latter method,

the stock taking continues throughout the year. A schedule is prepared for stop taking of various

bins. One bin is selected at random and the goods are checked as per shown in the bin card. Then

some other bin is selected at random and so on. The personnel associated with store keeping are

not told of stock taking programmed because store rooms are random. The perpetual Inventory

system refers to as “A system of records maintained by the controlling department, which reflects

the physical movements of the stocks and their current balance.”

8. Inventory Cost Reports:

Material cost report serve as means of communications usually in the written form of

facts relating to materials which should be the attention of various levels of management who

can use them to take suitable action for the purpose of materials control. Material control is

divided into three types:

1. Purchase Control

2. Stores Control

3. Consumption Control

Purchase control is to ensure the efficiency of the purchase department. Stores

control is the efficiency of the stores department & consumption control, the efficiency of the

departmental foremen. Proper design of material cost reports is essential, to achieve these

purposes of material control.

Pricing of Raw Materials:

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

 First In First out (FIFO) Method: This method assumes that the order, in which materials

are received in the stores, is the order in which they are issued from the stores. The materials

that are issued first are priced on the basis of the cost of materials received earliest.

 Last In Last Out (LIFO) Method: This method is the opposite of the FIFO method. It

assumes that materials that are purchased last are issued first. The materials issues are priced

on the basis of the cost of most recent purchases.

 Weighted Average Cost Method: In this method, material issues are priced at the weighted

average cost of materials in the stock. The weighted average price takes into account, the price

& quantity of the materials in store. It is better to issue the materials at weighted average price

method, because it recovers the cost price of the materials from production.
SUCCESSFUL INVENTORY MANAGEMENT

Successful inventory management involves balancing the costs of inventory with the

benefits of inventory. Many small business owners fail to appreciate fully, the true costs of carrying

inventory, which include not only direct costs of storage, insurance & taxes but also the cost of

money tied up in inventory. This fine line between keeping too much inventory & not enough is not

the manager’s only concern. Others include:

 Maintaining a wide assortment of stock, but not spreading the rapidly moving ones too thin.

Increasing inventory turnover, but not sacrificing the service level.

 Keeping stock low, but not sacrificing service or performance.

 Obtaining lower process by making volume purchases, but not ending up with slow-moving

inventory; and having an adequate inventory on hand, but not getting caught with obsolete

items.

The Purchasing Plan:

One of the most important aspects of inventory control is to have the items in

stock, at the moment they are needed. This includes going into the market to buy the goods early

enough, to ensure delivery at the proper time. Thus, buying requires advance planning to determine

inventory needs for each time period & then making the commitment, without procrastination. For

retailers, planning ahead is very crucial. In short, the purchasing plan details include:
  When commitments should be placed

 When the first delivery should be received

 When the inventory should be peaked

 When re-orders should no longer be placed &

 When the item should no longer be in stock

CONTROLLING INVENTORY

To maintain an in-stock position of wanted items & to dispose unwanted items, it is

necessary to establish adequate controls over inventory-on-order & inventory-on-stock. There

are several proven methods for inventory control. They are listed below, from the simplest to

the most complex:

 Visual Control enables the manager to examine the inventory visually, to determine if

additional inventory is required. In very small business, where this method is used, records

may not be needed at all or only for slow moving or expensive items.

 Tickler Control enables the manager to physically count a small portion of the inventory

each day, so that each segment of the inventory is counted every so many days, on a regular

basis.

 Click Sheet control enables the manager to record the item, as it is used on a sheet of paper.

Such information is then used for recording purpose.

 Stub Control (used by retailer) enables the manager to retain a portion of the price ticket

when the item is sold. The manager can then use the stub to record the item that was sold.
 As a business grows, it may find a need for a more sophisticated & technical

form of inventory control. Today, the use of computer systems to control inventory is far more

feasible for small business than ever before, both through the widespread existence of computer

service organizations & the decreasing cost of small-sized computer. Often, the justification for such

a computer based system is enhanced by the fact that company accounting & billing procedures can

also be handled on the computer.

 Point-of-sale terminals really provide information on each item used or sold. The manager

receives information printouts in regular intervals for review & action.

 Off-line point-of-sale terminals relay information directly to the supplier’s computer who

uses the information to ship additional items automatically to the buyer/inventory manager.

The final method for inventory control is done by an outside agency. A manufacturer’s

representative visits the large retailer on a scheduled basis, takes the stock count & writes the

re-order. Unwanted merchandise is removed from stock & returned to the manufacturer

through a predetermined, authorized procedure.

A principle goal for many of the methods described above is to determine the

minimum possible annual cost of ordering & stocking each item. Two major control values in use are:

1. The order quantity, the size & frequency of orders and

2. The re-order point that is the minimum stock level at which additional quantities are ordered.

The economic order quantity (EOQ) formula is one widely used method of computing the

minimum annual cost of placing an order, the annual sales rate, the unit cost & the cost of

carrying inventory. Many books on management practices describe the EOQ model in detail.
DATA ANALYSIS:

A. Before an analysis is attempted for assessing inventory control measures at ECIL, it is proposed to

present a summary on material documentation & procedure. The main objectives of

inventory accounting and valuation of inventories are:

1. Accurate & Regular recording of all transactions in the books.

2. Proper valuation of material receipts, issues, returns & balances.

System Overview:

The following systems are being followed in ECIL & the main features of the system are as

follows:

1. Receipt vouchers are prepared on receipt of materials

2. Issue vouchers are prepared for all issues of out-of-stores

3. All receipts, issues & returns are recorded in price stores ledger
 4. Stock transfer voucher (STV) is used for recording transfer of raw materials from one

division/group to another. Transfers are made at weighted average prices.

5. Finished goods delivery notes (FGDN) are used for transferring finished.

6. Physical verification is carried out at 6 regular intervals & discrepancies are reconciled &

rectified.

7. Work-in-progress (WIP) valuation is as per the accounting policy of the company.

8. Finished Goods valuation is as per the accounting policy of the company.

Material Documentation & Cost Control:

The material accounting & cost accounting system have been designed within frame work of

account codes & accounting policies, which would facilitate identifying direct elements of costs, such

as direct material, direct labor & directly allocable expenses (such as expenses of sub-contracting)

which are booked manually to the direct material. The following documentation & system is being

followed in ECIL:

Receipt Documents:

CSRV(Certified Stores Receipt Voucher) : Which is issued by the stores personnel to bills section

to financial accounting wing in order to classify the material into Raw Materials, Stores & Spares,

Consumable Tools, Packing Material, Sub-Contractors Services & other operational expenses, based

on the purchased order, the billing section does the provisional valuation by using fixed percentages

for freight, insurance & other incidentals & with regard to customs duty, the percentages as per tariff

are adopted & the following entry is proposed :

STOCK A/c Dr

SUNDRY CREDITOR A/c

Flow Chart of Receipt Document

Receipt of work order from

receipt stores

Collection of data & material

from inspection

Material
Inspection

Collection of data & material

from inspection
 Collection of data & material
from inspection

By this entry, the priced stores ledger(PSL) of inventory is built up & as & when the issue of

materials takes place, an MIR is issued, comprising of job material code, quantity etc., that is fed to

EDP. EFP calculates the value based on monthly weighted average method.

Based on these, MIR data the WIP is brought out by collating material

analysis (accounting of material consumption job wise). The direct material is broken job wise in

WIP ledger & the same is reconciled with the financial records. Thus, the direct material job wise

may be traced from WIP ledger. In the similar fashion, some other receipt documents & issued

documents are operated:

1. CPRV (Cash purchase receipt voucher), for cash purchase receipt.

2. FGIN (Finished goods issue note), for the finished products particularly of CG like hybrids,

Networks & PCBs are consumed as RMs in other group, for which a credit is given in the

expenses of CG & stock of that group is debited.

3. STV (Stock transfer Voucher), any stores useful for any group is taken from other group from

STV for which only stock accounts of the divisions are operated.
 4. MRN (Material Return Note), the items lying unused at shop floor after production activity is

over, are returned to stores under this document.

Based on the above documentation, EDP generates the following printouts for materials viz.,

1. Price stores ledger is brought out on monthly basis consisting on that month’s receipts, issues, and

balance stocks available values for RMs, stores & spares, consumable tools, packing materials.

2. Inventory is brought out on monthly basis comprising of material codes in seriatim along with

material, total value & also cumulative receipts & cumulative consumption are indicated.

3. Job wise material analysis is brought out on monthly basis for those jobs, for which materials

have been consumed along with value & description of the material in order to have monthly

record of materials used for each job. Non-moving material analysis are brought out on quarterly

basis. Items which are not moved from more than 6 months are reported regularly to the

management for identification & necessary action. Further A, B, C, D classified inventory report

is also being submitted to group management for their study & controlling purposes.
 Inventory Control & its Impact on Costs

Value wise inventory & consumption analysis are brought out on quarterly basis

indicating RM; SS, CT, PM are value at cost. ‘A’ class items which are 70%, ‘B’ class items are

valuing 20% & ‘C’ class items which are valuing 10% - of the total inventory are brought out for

verification of internal audit. The stores verify ‘C’ class items & to that extent a certificate is issued at

the year end, regarding the correctness. Physical balances are verified with a carded & the difference

is intimated to stores FAW of the group by the internal audit.

FAW of group verifies & gives the rectification of entries i.e., shortage item’s values are

charged off to physical inventory variation & the excess quantities are adjusted in the inventory

ledger, after obtaining the competent authority’s approval.

This system enables control on the inventories & at the same time costs on some are checked.

Materials issued to sub contractors are booked to consumption as and when issued through MIRS. A

record is being maintained at sub-contracts section, party-wise, job-wise & description of materials &

quantities issued.
 FINANCIAL ANALYSIS

1. Raw Material Inventory

Particulars 2002- 2003-04 2004-05 2005-06 2006-07 2007-08 2008-08

03
1. Raw Materials 4735 5630 5267 2304 1616 1878 1954

Materials 32701/ 49307/12 47247/12 41979/12 38917/12 47447/12 43153/12

Consumed P.M 12

2. Monthly 2725 4108 3937 3937 3243 3954 3956

Consumption
3. No. of Months 1.74 1.37 1.34 0.66 0.50 0.47 0.49

Raw Material

Stock Available

w.r.t Monthly

consumption

( 1 / 2)
 2
1.8
1.6
1.4
1.2
1
0.8
0.6
0.4
0.2
0
2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09

Interpretation:

• In 2003-04, there was again a decrease in the stock levels. It was 1.37 when compared with 1.74

in 2002-03.

• In 2004-05 it was 1.34 which indicated a decrease, even in 2005-06 there was a decrease of 0.66

• In the year 2006-07, it is 0.49 indicating a further decrease in the stock levels.

• In the year 2007-08, it is 0.47 indicating a further decrease in the stock levels.

• In the year 2008-09, it is 0.49 indicating an increase as compared to earlier.

2. Work-in-progress inventory

Particulars 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09

1. Work-in- 8350 3877 4260 3372 3799 3233 2572

progress

Cost of 62381/12 81160/12 73880/12 67710/12 62842/12 56897/12 61894/12

Production(P.M)

2. Monthly 5198 6763 6157 5643 5237 4741 5157

Consumption

3. No. of Months 1.61 0.57 0.69 0.60 0.73 0.68 0.49

WIP held in

inventory = (1 / 2)
For arriving No. of Months, gross working capital & each components including RM, WIP, FGs are

co-related as follows:

a. RM stocks are co-related to material consumption

b. WIP is co-related to cost of production

c. FGs are co-related to net sales

Interpretation on ABC:
Raw Material: The Corporation held a maximum stock of Raw Material & improved year by year &

reached 0.73 months at the end of the year 2006-07.

Work In Progress: The Corporation’s WIP was low during the year 2008-09 & was around 0.49

months.

Finished Goods: The average finished goods stock held during the period of study is 0.20 months

with peak – FGs of 0.30 months & lowest to the tune of 0.16 months per month.

In the similar way, the Inventory turnover ratio has increased from 7.57 in the year 2004-05 to

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

2006-07 has increased from 8.9211.

Components of Inventory
The components of inventory are:

A) Raw Materials Inventory Turnover:

Raw Material Inventory Turnover = Materials Consumed / Average Raw Material Inventory.

Particulars 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09

Material 32701.28 49307.20 47246.11 41979.11 38916.93 39539 43153

Consumed

RM – Op 2473.42 3224.95 4545.99 4277.66 1646.53 1616 1878

Stock 3224.95 4545.99 4277.99 1648.53 1616.21 1878 1954

Cl

Stock
Avg RM 2850 3885.5 4412 2963 1633 1747 1916

Inventory

RM Inventory 11.48 12.69 10.71 14.17 23.84 22.26 22.52

Turnover
Interpretation:

• The Raw material inventory turnover ratio has increased from 11.48 to 12.69 from the year

2002-03 to 2003-04, which shows that the RM is efficiently managed.

• The Raw material inventory turnover ratio has decreased from 12.69 in the year 2003-04 to

10.71 in the year 2004-05 which indicates that RM is not properly managed.

• The Raw material inventory turnover ratio has increased from 10.71 in the year 2004-05 to

14.17 in the year 2005-06, which indicates that the RM has been managed to compensate to

the previous decline in the Raw material inventory turnover ratio.

• The Raw material inventory turnover ratio has increased from 14.17 in the year 2005-06 to

23.84 in the year 2006-07 which indicates that the RM has been managed to compensate the

previous decline in Raw material inventory turnover ratio.

• The Raw material inventory turnover ratio has decreased from 23.84 to 22.26 in the year

2007-08, which indicates that RM is not properly managed.

• The Raw material inventory turnover ratio was 22.52 in year 2008-09, which has increased

further.
(B) WIP Inventory Turnover:

WIP Inventory Turnover (WIPTR) = Cost of Production / Average work in progress inventory

Particulars 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09

Cost of Production 62381 81130 73880 67710 62842 56897 61894

WIP – Opening 6193 8350 3876 4260 3372 3799 3233

Closing 8350 3876 4260 3372 3799 3233 2572

Avg WIP 7271.5 6113 4068 3816 3585.5 3516 2902

WIP Inventory 0.858 13.277 18.161 17.744 17.527 16.182 21.32

Turnover

Interpretation:
 • The WIP Turn Ratio has increased from 0.8579 to 13.2766 from the year 2002-03 to 2003-04,

which shows that the WIP is efficiently managed in order to compensate for the previous

declined.

• The WIP Turn Ratio has increased from 13.2766 to 18.1613 from the year 2003-2004 to

2004-05, which shows that the WIP is efficiently managed in order.

• The WIP Turn Ratio has decreased from 18.1613 to 17.7437 from the year 2004-05 to 2005-

06, which shows that the WIP is not managed efficiently.

• The WIP Turn Ratio has decreased from 17.7437 to 17.5267 from the year 2005-06 to 2006-

07, which shows that the WIP is not managed efficiently to the required level.

• The WIP Turn Ratio has decreased from 17.5267 to 16.1823 from the year 2006-07 to 2007-

08, which shows that the WIP is not managed efficiently to the required level.

• The WIP Turn Ratio has increased to 21.32 in the year 2007-09, which shows that WIP has

been managed efficiently.

RATIO ANALYSIS

Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory

Cost of Goods Sold (COGS) = Sales – Gross Profit

Average Inventory = (Opening Stock in inventory + Closing Stock in inventory) / 2

Inventory turnover ratio

Particulars 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09

Sales 67411.65 100055.98 93455.40 77066.76 70029.03 100590 80557

Gross Profit 9937.16 17372.76 14489.74 6927.01 6222.80 20702 23405

COGS 57474.49 82683.22 78965.66 70139.75 63806.23 79888 57152

Op Inventory 12559.82 13543.88 10158.94 10710.86 6622.64 7681.96 6855

C l Inventory 13545.88 10158.94 10710.86 6622.64 7681.96 6855 6884

Average 13545.88 12345.44 10434.90 8666.75 7152.30 7268 6869

Inventory
Inventory 4.25 6.70 7.57 8.09 8.9211 10.99 8.3

Turn Over

Ratio
Interpretation:

 The inventory turnover ratio has increased from 4.09 to 8.3 from the year 2002-03 to 2008-09,

which shows that the inventory has been efficiently managed.

Percentage of raw material on cost of production:

Particulars 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09

Raw 32701.28 49307.20 47246.11 41979.11 38916.93 39539 43153

Material

Consumed

(A)
Cost of 62381 81130 73880 67710 62842 56897 61894

production

(B)
% of A on B 52.42% 60.77% 63.94% 61.99% 61.92% 62.22% 69.72%

Interpretation:

From the above calculations it has been observed that the raw material consumption is low

in the year 2002-03, but it has been increasing percentage after 2002-03, which need to be monitored

for buying in effective controls.

FINDINGS:

 As ECIL is a multi product organization catering to different customers on divergent

technologies, the inventory procurement for various ranges of products is quite high.
  Inventory Management is an important function which effects the reliability of stabilized

production & profitability of the organization

 Inventory Procurement is also based on & does not conform to economic batch quantities,

leading to surplus inventories & non-moving inventories.

 It is also observed that there are frequent changes in specifications by the customer rendering

the already procured inventory, either obsolete or non-moving.

 There is a regular physical verification for ‘A’ & ‘B’ class items, by internal audit department

to highlight on non-moving inventories.

 As per the directions of the management, non-moving inventory of a particular business group

has to be listed & circulated to all the other divisions for any possible usage before action is

taken for disposal.

 The % of raw material on cost of production is found to high in year 2008-2009 i.e., 69.72

which indicates organization has an effective utilization of material inventory.

 In spite of the above constraints, there is reasonably a good control noticed as reflected in the

period of holding of inventories & turnover ratio.

Suggestions

 Suggestions must be taken from all departments of the organization for proper maintaining of

stock.
  Once non-moving inventory is observed & declared, a quick disposal action has to be

installed. This exercise has to be carried on throughout the year.

 As a preventive measure there should be a regular monitoring mechanism at the stage of

procurement itself, whether there is a control exercised in purchasing materials in line with

estimated, standard Bill of Material.

 A regular reporting system on inventory should be in place to highlight on carrying costs &

liquidity covering all the business groups & at the corporate level.

 Inventory management is to keep the stock in such way that neither there is over-stocking or

under stocking.

 Under-stocking will result in stoppage of work. So, the investment inventory management

should be kept in reasonable limits.

 Organization need to be upgrade of the technology, which in turn increases effective

utilization of raw material.

 Organization has to attention on the amount of % of raw material on cost of production, which

is slightly high when compared to ideal percentages.

BOOKS:
1. CHARY, S.N, 2003, Production and Operation Management, Tata McGraw-Hill, 2nd Edition,

Page no: 280.

2. R.K.SHARMA & SHAAHI.K.GUPTA, 2008, Management Accounting, Kalyani

Publishers, 11th Revised Edition, Page no: 24.26.

3. I.M.PANDAY, 2005, Financial Management, Vikas Publications, 9th Edition, Page no: 624.

4. Web Site: www.ecil.co.in