CHAPTER I

INTRODUCTION
MEANING AND NATURE OF INVENTORY

Inventory can be referred to as sum of the value of raw materials

fuels and lubricants, spare parts, maintenance consumables,
semi processed materials and finished goods, stock at any given
point of time.

In large companies inventory place a most significant part of the

current assets. The business has about 15 to 30% of inventories
in total assets.

Inventory is composed of assets that will be sold in feature in the

normal course of business operations. The assets which firms
stores as inventory is anticipation of need are raw materials, work
in progress and finished goods.

MEANING OF INVENTORY MANAGEMENT

Inventory management consists of maintaining for a given

financial investment an adequate of something in order to meet
and accepted pattern of demand. Inventory considers control
over costs of inventory on one hand an handle the size of
inventory on other hand.

Controlling investments in inventories constitute crucial part in

current assets.

An efficient inventory controlling system will decide,

What to purchase
When to purchase
How to purchase

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Size of purchase

And from where to purchase (Suppliers)

The main purpose of inventory management is to ensure

1. Required quantity of availability of raw materials

2. Minimize the investments in inventories
3. Maintain reasonable stock levels not excess or not under
stocks.

INVENTORY CONTORL

Inventory control is the system devised an adopted for controlling

investments in inventory. It involves inventory planning and
decision making with regard to the quantity and time of
purchase, fixation of stock levels, maintenance of stock records
and continuous stock – taking.

OBJECTIVES OF INVENTORY CONTROL

Inventory control includes not only of the physical stocks but also
of the funds invested on it.

That twin objectives of inventory control are,

1. To maintain a balanced inventory.

2. To keep the amount invested in inventory as low as

possible without hampering either flow of the production
or deliveries of finished goods.

 To avoid both under stocking and over stocking of

inventory.

 To eliminate duplication in ordering or replenishing

stocks. This is possible with the help of centralized
purchasing.

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  To ensure continues supply of materials, spares and
finished goods so that production should not suffer and any
time and customers demand should also be met.

 To design proper structure for inventory management.

A clear cut accountability should be fixed at various levels
of the organizations.

 To ensure right quality goods at reasonable prices.

Suitable quality standards will ensure proper quality of
stocks. The price analysis, the cost analysis will ensure
paying of proper prices.

 To facilitate furnishing of data for short term and long

term planning and control of inventory.

NEED FOR INVENTORY MANAGEMENT

In this competitive business world each and every business

organization need inventory management system for determining
what to order, when to order, where and how much to order so
that purchasing and storing costs are the lowest possible without
affecting production and sales. Thus, inventory management
control incorporates the determination of the optimum size of the
inventory-how much to be order and when after taking into
consideration the minimum inventory cost.

The over all inventory management includes design and

inventory control organization with proper accountability
establishing procedure for inventory handling disposal of scrap,
simplification, standardization and codification of inventories,
determining the size of inventory holdings, maintaining record
points and safety stocks, economic order quantity, ABC analysis
and VALUE analysis and finally framing an INVENTORY MANUAL.

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OBJECTIVE OF THE STUDY

The main objective of the project work is to study and analyze

and preparation INVENTORY MANAGEMENT in Tecumseh India
products private Ltd.,

The objectives are :

1. To know the purchasing procedure of the inventories at

Tekumseh.
2. To know classification of inventories.
3. To know codification of inventories.
4. To know the analysis of the records of stock levels.
5. To know the analysis of the JIT system of Tecumseh India
products private Ltd.
6. To know the analysis of the two bin system.
7. To know the analysis of the inventory turn over ratio.

SCOPE OF THE STUDY

The study conducted with available data from the annual reports,
internal reports etc… and also interacting with employees of
Tecumseh and analysis was made accordingly.
The study conducted for a period of 45 days it is may not be
detailed in all aspects.

5
METHODOLOGY

To attain the objective of studying the inventory of Tecumseh

Products India private Ltd. The information has been collected in
two ways :

1. Primary data
2. Secondary data

Primary Data :

In Primary data the analysis of purchasing procedure, inventory

data, inventory turn over ratio, stock levels, ABC analysis, Two
bin system, JIT has made possible by the discussions with various
administrative executives and other concerned people of
Tecumseh Products India Pvt Ltd.

Secondary Data :

The Secondary data has been collected from annual reports of

organization, internet (www.Tecumseh.com) and books.

Problem identification

To design a optimum level of inventory to manufactures

compressors to the organization .The optimum level of inventory
avoids excess & deficits inventory. Which is dangerous for the
organization.

6
Limitations:

1 The study period of 45 days as prescribed by university

2 The study is limited unto the date and information provided

by Tecumseh India products private Ltd and its annual
reports

3 The report will not provide exact Budgetary System status

and position in Tecumseh India products private Ltd; it may
vary from time to time and situation to situation.

4 This report is not helpful in investing in Tecumseh either

through disinvestments or capital market.

5 The accounting procedure and other accounting principles

are limited by the company changes in them may vary the
actual and budget performance.

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CHAPTER II
COMPANY PROFILE

8
 TECUMSEH

Mr. Ray Herrick a former employee of ford motor company

started the company in 1937 the company went into public with
an offering of 25000 shares. Mr. Ray Herrick has passed away in
1973 but vision lived through his son ken the current chairman of
the board and his grandson Mr. Todd W Herrick who has been
president and CEO since 1984 Tecumseh India is a preferred
supplier to world who of the Ac & Industry in India and in Middle
East SAARC Countries

Tecumseh products company is a US $ 2 billion cooling giant

having a global presence and a global vision with 24
manufacturing locations in 4 continents a cross 100 countries
employing over 20000 people it is the world largest independent
compressors manufacturing company with 10% market share of
the global 150 million units a year compressors Market.

Tecumseh products company products are grouped into 3

principal industry segments:
1. compressors products
2. engine and power
3. pump products

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ORIGIN OF COMPANY:
The company was originally established and registered in 1963
under the name of USHA refrigeration industries limited(URIL)
this unit manufacturing compressors for water cooler air
conditions and water coolers lala sharat Ramji who was from
renowned industrial family of DGM and coromondal group of
companies started URIL in 1970 the URIL was changed to shri
ram refrigeration limited and the business was divers towards
Manufacturing of diesel engines and water coolers shri ram
industries played a great role line the field and capture more than
50% of market share in India shri ram industries also kept its
hands in Mr. Siddhartha c shriram ram industries also kept its
hands in Mr. Siddhartha c shriam became the chairman cum
managing director (M.D) The product saw sea change in the
industrial policy, which resulted in a great change in the industrial
sector. in the process for survival, shri Ram went into technical
collaboration with wasting house US and was named as siel
compressors.
Siel compressors were the first Indian
compressors. Later wasting House stopped manufacturing
compressors and steel went into technological collaboration with
Techmseh products company USA in 1988.TECUMSEH mean
CROUNCHING PANTHER derived from chief of the SHAWNEE tribe.
(1768-1813).it started operation to offer new state of art AW
series to Indian customers subsequently Tecumseh Products
Company took over siel group become 100% subsidiary company
of Tecumseh Products Company. As soon as Tecumseh took over

10
the company stopped manufacturing water coolness and
restricted its production to CFC/hermetically sealed compressor.
TPIPL is an ISO and 9001 certified American
based company Tecumseh India is a 100% subsidiary 10
Tecumseh products company USA, which is world only full line,
independent manufacturing locations is 4 continents across 100
countries employing over 19000 people. In India it has 20 sales
office and an extensive network of over 200 dealers and move
than 600 registered small scales industries.TPIPL has gained core
expertise in R&D AW assembly and AW machine shops such that
it acquired a lion’s shae compressors marked by gaining a 50%
share.

Hyderabad plant:

The Hyderabad plant is on a 54 acres land at the Balanagar

industrial belt 15km away from Hyderabad city on highway line
going towards HMT Limited Narsapur road at Hyderabad

TPIPL manufacture air conditioner form 100 BTU to 6lakhs BTU

(British Thermal Unit) and compressors for deep freezer, bottle
coolers and water coolers which are considered to be world’s no 1
in 150 million compressor market a year. The plant has the
manufacture capacity of 300 units per day. This plant has a
technology development center with full R&D facility. The plant is
also supported by two service centers AW service center and MC
service center and MC service center Hyderabad plant has six
regional offices among which four offices are metro cities The

11
remaining tow are at Ahmadabad and secunderabd., Besides
there are branch officers and depots located in prime cities
across the country. This plant also has network of about 177
dealers across the nation and his preferred supplies to key
original equipment manufactures like LG, VOLTAS, BLUESTAR,
GODERJ, VIDDEOCON, FEDDERS, AMTRIX, HITACHI, etc.TPIPL
Hyderabad plant was successful in getting the ISO 9001
certification for maintaining quality of compressor in 1994 and for
eco friendly environment maintenance the company has ISO
14001 certification . TPIPL Hyderabad has total of 829 permanent
employees.

• In 1997 Tecumseh fully acquired SRI, Hyderabad.

• In 1998 the turnover for the year was Rs.111.28 Crores with
on operational profit of Rs.14.14 Crores and PBT of Rs.
10.50 Crores.
• Company not only meets its target but also increase it
market share and company think about amalgamates.

Employees for the current year are:

Permanent Worker 402

Staff 185
Officers 156
RSO 45
Total To-Dated 2006 Employees is: 788

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Company have 1000 of contact Worker. It is divided as Badali
or Special Badali.

AC Compressors Business:

• The Capacity is 3,00,000(expanding)

• The plant is certified company with ISO 9001-2000
version, ISO 14001
• Models Ac applications AW
• Certification VDE,

Products:

Air conditioning (12,000-29, 5000 BTU per/h

Compressors

Compressors manufactured at Hyderabad:

• AW series- AW.AWQ AWA etc
• Rotaries (to be introduced in 2003)

The management has started development activates in

the following areas.
a) Effluent Treatment Plant
b) Tree Plantation
c) Biological Treatment Plant

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 d) Rain water harvesting is to increase the group
water level and TPIPL has the distinctions of
being the first organization in this regard.
e) Vermin culture is the process of utilizing
canteen food wastage for converting in to
natural manual.

A new project under the name of VIBHAV

ROTARY PROJECT is under construction this
completer by the month of july 2005 on
completion of this project, the production starts
form January of 2006, with a production of
10.000 units per day with this projects, the
market share of production of compressors of
Tecumseh increase to 15%

BALLABGARH PLANT

At Faridabad, in North India, they have a capacity of about a

million compressors. This plant is being relocated to an
integrated unit a Ballagarh with an investment of Rs. 200 Crores
(Approximately) This state of the art plant for manufacturing of
non-CFC compressors will be one of the best compressors
facilities in Asia. This is located on a 21 acre land on the Delhi-
Mathura National Highway.
Mr.Vipin Sondhi, Managing Director, head Tecumseh India, which
employs about 2500 people.

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Tecumseh India a 100% subsidiary of Tecumseh product
company USA wills continue its mission of offering the latest
compressors to the discerning India customers.
Tecumseh India is the manufacturing of compressors in the
country catering to segments of segments air-conditioners,
domestic and commercial refrigeration and is a leading player
with growing Indian market for compressors in all the segments.
• The company was incorporated on Jan 30.1997 &
operational commenced since 14th July 1997, after take over
of compressor division of Whirlpool of India Limited.
• The company acquired the compressor business from WOIL
by taking over the plant & equipment of the compressors
division at Faridabad and the entire facilities of Ballabgarh
excluding the plastic division of WOIL.
• The acquisition was funded by equity, but since taken over,
the company supplies to WOIL its requirement of
compressor.
• The company recorded a turnover of Rs. Crores since taken
over till 31st Dec 1997 since purchase by WOIL did not
materialized the turnover has been less which led to net
loss Rs. 4.93 Crores.
• The company is in process of implementing a major
expansion diversification programmed at Ballabgarh to
enable the manufacture of Compressor once the project
implemented by 1988 the company would be the pioneer in
manufacturing environment.

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 • In 1998 the company recorded a turnover of 99.98 Crores
against turnover of RS 26.12 Crores for the period July 1997
to Dec 1997.
• The net loss recorded was RS.6.87 Crores against RS.4.92
Crores during 1997.

Refrigiration+Commercial Business:
• Plant is certified ISO 9001, R-134 a certified plant, and
Own limitation, Wire drawing facilities.
• With capacity of 1,500,000
• Models MLA ,TIE

PRODUCTS

Domestic refrigeration (330-1200 BTU per hr) and

Commercial (700 -3000 BTU per hr)
Compressors manufactured at ballabgarh ;
• TIE models
• MLA models
• MLA CRA model
TPIPL vision:

We are not going to simply provide compressors

are going to provide customer solution”. It is our goal to be the
global leader in all of the markets which we choose to participate
we will pursue disruptive technologies to redefine our products.

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TPIPL mission :

We will leverage our global expertise in mechanical,

electrical, flood handling related components and services to
provide comprehensive solution for our customers needs
compressors, engines, electrical motors, pumps, electronics and
controls.

• We will be best in class and the most effective cost

producer by utilizing the principles of TQM,6 SIGMA and
LEAN.
• Our origination will modify itself in response to change in
environment at a pace and amount of change that can be
made without eliminating or impeding our on going
effectiveness
• Incisive continuous strategic thinking will be will
communicated and shared by the organization
• Incisive continuous strategic thinking will be well
communicated and shared by the organization

Our commitments:

KEY BUSINESS ACTIVITIES:

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  Set the world industry standard of excellence for customer
satisfaction achieve total quality
 To attain and surpass global quality and reliability standards
for our products.
 Maintain clear technology leadership
 Market share leadership with focus on customer needs.
 Meet business and financial commitments.

IMAGE:

To build up a high degree of customers confidence by

sustaining international markets in regard to supply of spare
parts and after sale Service. The HRD policy of Tecumseh is
manifested in the code of conduct of TPIPL listed

 Respect and mutual trust

 Integrity and fairness in all matters
 Team work
 Best customer service

TPIPL QUALITY POLICY:

Committed to total customer satisfaction by meeting their needs,
expectation.

 And aspiration stated, implied or latent

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 Striving to provide products and service of global quality
standard and to reach a position of leadership in the field of
operations, setting new values.
 Continuous improvement across the organization an up
gradation of product technology and process supportive
environment, at least cost to society share be the means to
achieve the goals.
 The approach will be through proper systems and procedures
and total involvement of employee’s vendors and other
business associates.

TPIPL ENVIRONMENT POLICY:

The vision of Tecumseh India is to be serene green and eco
friendly co-operation carrying out all its operation
contributing to preservation of environment and natural
resources for benefit at large
 Among others this can be achieved through allocation of
company wide priority for sustainable development with total
involvement and commitment.
 Evaluation and up gradation of current technology products
and raw materials for minimization handling and disposal of
solid liquid and gaseous waster
 Realization of tangible objective and target set for continual
improvement to control and prevent pollution and conserve
resources.
 Variable earning sharing of value addition
 Agreement process organization needs
 Non conformance reporting audits

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 Open house//communication meeting
 Team assessment and feed back
 Changing life sty les.
SAFETY POLICY:

• Education and training

• Creating a safe working environment
• Providing adequate and required personal protective
equipment
• Updating safety rules and procedures
• Continuous improvement through safety audits Risk
assessment Audits

The Employees and all other share:

• Follow safety rules and procedures.
• Use all the required personal protective equipment
• Adopt safe working methods
• Take a proactive interest in maintaining safety standards.

TPIPL’S SEVEN DEADLYSINS:

a) Inconsistent product quality

b) Slow response to market place.
c) Lack of innovate competitive product
d) Un competitive cost structure
e) Inadequate employee involvement
f) Unresponsive customer service

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g) Ineffective resource allocation

STATEGIES&PROCESS AT TPIPL:
 Work place improvement.
 Creativity club
 KRA’S (improvement/suggestions)

The management has started development activities in the

following areas.
 Efficient treatment plant.
 Tree plantation.
 Rain water harvesting is increase the ground water level and
TPIPL has distinction of being of first organization in this
regard.
 Semi culture is the process of utilizing canteen food wastage
for converting into natural manure.

QUALITY IMPROVEMENT MEASURES:

Yours company’s Hyderabad &ballabgarh plant are ISO 9001

(version 2000) certification. Your company is constantly meeting
the quality requirement of Domestic& International customers.

Environmental protection & Conservation of Natural resources:

 During the year, ISO 14001 first Annual Assessment after
Recertification Audit carried out by the corporate Director of

21
 Environment control Hyderabad unit had scored 95 points and
reveal any non conformities
 During Annual C0mpliance Assurance review carried out by the
corporate Director of Environment control Hyderabad unit had
scored 95 points and Ballabgarh unit had scored 89 points of
115 for 2004

The following conservation measures were undertaken by your

company.

 Usage of De-mineralized water in place of Municipal/Bore

water in process.

 I MECO BULLOWS components cleaning equipment have

been introduced in EOU for effective cleaning of
components ot minimize water & chemicals.

 Export oriented unit is completely R-134 a compatible

plant.

 Energy factory canteen renovation & new kitchen

equipment installation.

 Construction of new septic tank for effective treatment of

sewage water.

22
  Mezzanine floor fabrication &erection to install Dehydration
oven.

 LPG yard renovation to Accommodate 5 ton LPG bullet to

cater pre treatment plant requirements.

RESEARCH AND DE VELOPMENT:

1. Specific areas in which R & D carried out by the
company
 Designed and development high out by the energy efficient
compressors of the existing and higher cooling capacity
 Improvement in product quality
 Introduced AW 1000 q Compressor for small size air
conditioners
2. Benefits derived as a result of above R&D:
 Development of new products
 Improvement in product quality
 Optimization of processing parameters
 Improved customer satisfaction and developed new
customers
 Lower power expense for the customer thus reducing his
recurring ex peen
3) Future plan of action:
 Design improvements
 High efficiency low noise compressors
 Enhanced range of compressors

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  Product ionization of newly developed refrigerator
compressor

1) Efforts:
Technology absorption and innovation company has
focused on innovation and is working on a refrigeration
compressor, which would be equivalent or better than the best
available in the global market .
It has upgradedits test lab facilities and reduced its
dependence on foreign test labs. This gives indigenous capability
to develop, test and launch new products.
2) Benefits: Derived as a result of the above efforts is product
improvement, cost reduction, product development import
substitution etc.

Departments of TPIPL:
• Rotary project(new)
• Human resource development
• It
• Welfare department
• FCD
• CTS&S---
• TDC
• Attendance and pay office(A&PO)
• Electronic data processing (EDP)
• Provident fund and credit cooperative society(PF&CCS)
• Maintenance and engineering department(MED)

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 • EOU
• Logistics
• Quality control department
• AW PRESS shop
• Aw machine shop
• Dispensary
• Canteen
• Chemical and technological laboratories
• Legal compliance and going beyond setting new standards
• Stores
• Material and purchase
• Accounts and audit

Products of Tecumseh:

Tecumseh products are grouped into 3 principal industry

segments
• Compressor products
• Engine and power train products
• Pump products

New products from Tecumseh:

AW 1000QC COMPRESSRS
Compact 1-ton compressors

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Ideal for Compact RAC units
Products from the well known AW series of compressors
Silent and efficient
Very well accepted by the market

AE 2415 AK Compressors:
A huge energy saving compressors that cuts power bills compact
and light weight
Wide voltage range
Manufactures with state of technology
Dependable friend for all deep freezers
Finance management:
1), cadres
2). Functions of Finance Department

Milestones:

1961: Technical collaboration with wasting house electrical

international company USA.
1962: The name IRI was changed to USHA Refrigeration
Industrial Limited
1964: Started production of Wasting house compressors, this
is known as SRX
1966: The name of USHA refrigeration industries limited was
again changed to shri ram refrigeration industries limited
1967: Manufacturing of water coolers was added.
1969: Added manufacturing of diesel engines pumps sets
1986: started marketing electronics voltage connectors

26
1987: Added manufacturing of room air conditioners entered
into technical collaboration agreement with Tecumseh
products company USA worlds largest manufacturer of air
conditioning compressors.
1990: Discontinued manufacturing of diesel engines. The
company expanded the rage of room air conditioners and
launched split air conditioners.
1992: Shri Ram Refrigeration Industries ltd was merged with
siel.
1993: First company in India to get world bank aid to phase
out CFC refrigerants under the Montréal protocol

1994: TPIPL HYDERABD has been awarded the ISO 9001 for
its quality man agent system by BVQI
1995: Set up world class compressor manufacturing plant to
increase volume and range of Tecumseh compressors.
1996: 100% acquisition (20 million equity shares) by TPIPL
1999: TPIPL certified for ISO 14001 by UL India
2001: Won National award for excellence in energy
management.
2002: Won Genentech Environment excellence silver award
for outstanding achievement in environment management.
2003: Won Genentech Environment excellence silver award
award for outstanding achievement in environment
management.
2004: TPIPL has achieved the prestigious National award for
excellence energy efficient unit conducted by CII at
Chennai.

27
2005: Won Genentech safety award.

CERTIFICATIONS:-
ISO 9001-2000 VERSION:

As Tecumseh is ISO 9001-2000 certified company it makes all the

employees aware of the OSO norms. The topics covered under
this training program are
1. Back ground to revision of ISO 9001 standards
2. Concepts used in the new standard.
3. Process based quality management system model.
4. Alignment with other standard for example ISO –EMS 14000,
health and safety
5. Overview of 9001:2000
a) Scope
b) Application normative reference
c) Terms and definitions

28
 6. Key definitions in new standards
7. Concept of continual improvement

Under overview of 9001-2000 the program also include

information on five clauses

1. Quality management system: It includes

a) General requirement
b) Quality management
c) Documents requirement
d) Control of document
e) Control of records

2. Management responsibility: It includes

 Management commitment
 Customer focus
 Quality policy
 Quality objectives
 Responsibility and authority
 Communication
 Management review

29
3. Resource management: It includes:
a) Provision of resources
b) Human resource competence and awareness and training
c) Infrastructure
d) Work environment

4. Product realization: It includes

a) Planning of public relations
b) Customer related process
c) Customer communication design
d) Purchasing
e) Control of production
f) Service provision
g) Control of monitoring
h) Measuring devices

5. Measurements analysis and improvement Monitoring

and measurement of
a) Customers
b) Internal audit
c) Procedures
d) Product

I. Control of non conforming product

II. Data analysis
III. Corrective actions and improvements

30
IV. Preventive action

Due to exposure to ISO 9001-2000 norms and requirement the

employees know how to carry out their work. They know about
record maintenance and its importance. Thus making all the
employees aware of these standards it will be easy for the
organizations to produce quality products.

CHAPTER III
CONCEPTUAL FRAMEWORK

31
 INVENTORY MANAGEMENT
Tecumseh Products India Private Limited.

INTRODUCTION:

Every enterprise needs inventory for smooth running of its

activities. It server as a link between the production and
distribution process. The greater a time lag, the higher the
requirement of inventory the unforeseen fluctuation of inventory
demand and supply of goods, fluctuating inventory prices,
necessitate the need for inventory management.

The investment inventory constitutes the most significant

part of the current assets inventory of the under taking. Thus it is
very essential to have a proper control and management of
inventory.

32
Meaning and nature of inventory

The general meaning of inventory is stock of goods or list of

goods inventory. In accounting language it means stock of
finished goods. For inventory manufacturing concern it includes
raw materials, work in progress, consumables finished goods and
spares etc.

1) Raw materials:
If forms a major input inventory in organization. The
quantity of raw materials required will be determined by
the rate of consumption.

2) Work in Progress :
The work in progress is that stage of stocks, which are in
between raw materials and finished goods.

3) Consumables :
These are the material, which are needed to smoothen, the
process of production. These do not directly go into
production, but act as catalyst.

33
4) Finished Goods :
These are the goods, which are ready to sale for the
consumers. The stock of finished goods provides as buffer
between production and market.

5) Spares:
Spares also from a part of inventory. The stocking policies
differ from industry to industry.

Inventories cost account for nearly 55 percent of the cost of

production, as it is clear from an analysis of financial statements
of large number of private and public sector organizations. So, It
essential to establish suitable procedures for proper control of
materials from the time of purchase order placed with supplier
until they have been consumed properly and accounted for.

Definition:

The term inventory refers to assets, which will be sold in

future in the normal course of business operations. The
assets, which the firm stores as inventory in anticipation of
need, are raw materials, work-in-progress/process, and
finished goods.

Inventory often constitute a major element of a total working

capital and hence ft has been correctly observed, 'Good
inventory management is good financial management’.

34
Inventory control is a system, which ensures the provision of
the required quantity at the required time with the minimum
amount of capital.

Inventories are the second largest asset category for the

manufacturing firms next to plant and equipment.

Inventory control includes scheduling, the requirements,

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

Objective of inventory management

The main objective of inventory management are operational and
financial. The operational object means availability of materials
and spares in sufficient quantities for undisturbed flow of
production. The financial objective means investments in
inventories should not remain idle and minimum working capital
should be locked in it.
THE OTHER OBJECTIVES ARE:

1) To ensure continues supply of inventories to the production.

2) To avoid over stocking and under stocking.

35
3) To maintain optimum level of investment in inventories.

4) To keep material cost under control, to keep low cost of

production.

5) To eliminate duplication in ordering or replacing stocks.

6) To minimize losses through, deterioration, pilferage,

wastage and damages.

7) Designing structures for good inventory management.

8) Perpetual inventory control of materials.

9) To ensure right quality of goods at reasonable prices.

Analysis of prices cost and value.

10) To facilitate data for short and long term planning and
control of
inventory.
NEED FOR INVENTORY CONTROL:

If a cost accounting system is to be effective there must be a

proper control of inventory and supplies form the time orders
are placed with suppliers until they have been effectively
utilized in production.

36
Materials are equivalent to cash and they make up an
important part of the total cost. It is essential that materials
should be properly safeguarded and correctly accounted.
Proper control of material can make a substantial
contribution to the efficiency of a business. The success of a
business concern largely depends upon efficient purchasing,
storage, consumption and accounting.

In a large firm the planning and routing department is

responsible for arranging how and where the work is to be
done and issue instructions. It sets definite time schedules
so that necessary materials are delivered to the proper
department in proper time not too long before hand neither
lest it should interfere with other work nor after they are
required as this result in idle time.

Business firm keep inventories for different purposes. Every

firm big or small trading or manufacturing has to maintain
some minimum level of inventories. Based on some motives
the inventories are maintained.
a. Transaction motives:
Every firm has to maintain some level of inventory to meet
the day-to-day requirements of sales, production process,
customer demand etc. In this finished goods as well as raw
material are kept as inventories for smooth production
process of the firm.

b. Precautionary motive:

37
A firm should keep some inventory for unforeseen
circumstances also like loss due to natural calamities in a
particular area, strikes, lay outs etc so the firm must have
some finished goods as well as raw-materials tc meet
circumstances.

c. Speculative motive:
The firm may be made to keep some inventory in order to
capitalize an opportunity to make profit due to price
fluctuations.

REASONS AND BENEFITS OF INVENTORY:

The optimal level of maintaining inventory is a subjective

matter and depends upon the features of a particular firm,

(i) Trading firm:

In case of a trading firm there may be several reasons for

holding inventories because of sales activities that should
not be interrupted. More over it is not always possible to
procure the goods whenever there is a sales opportunity as

38
there is always a time gap required between purchase and
sale of goods. Thus trading concern should have some stock
of finished goods in order to under take sales activities
independent of the procurement schedule.

Similarly, a firm may have several incentives being offered in

terms of quantity discounts or lower price etc by the supplier
of goods. There is trading concern inventory helps in a de-
inking between sales activity and also to capitalize a profit of
opportunity due to purchase made at a discount will result in
lowering the total cost resulting in higher profits for the firm.

(ii) Manufacturing firm:

A manufacturing firm should have inventory of not only the
finished goods, but also of raw materials and work-in-
progress for following reasons.

(a) Uninterrupted production schedule:

Every manufacturing firm must have sufficient stock of raw
materials in order to have the regular and uninterrupted
production schedule. If there is stock out of raw materials in
order to have the regular and uninterrupted production
schedule. If there is stock out of raw material at any stage of
production process then the whole production may come to a
half. This may result in custom dissatisfaction as the goods
cannot be delivered in time more over the fixed cost will
continue to be incurred even ff there is no production.

39
Further work-in-progress would let the production process
run smooth. In most of manufacturing concerns the work in
progress is a natural outcome of the production schedule and
it also helps in fulfilling when some sales orders, even if the
supply of raw-materials have stopped.

(b) Independent sales activity:

Inventory of finished goods is required not only in trading
concern but manufacturing firms should also have sufficient
stock of finished goods. The production schedule is a time
consuming process and in most of the cases goods cannot be
produced just after receiving orders. Therefore, every firm
has to maintain minimum level of finished goods in order to
deliver the goods as soon as the order is received.

ESSENTIALS OF INVENTORY CONTROL:

The important requirements of Inventory control are:
a) The proper co-ordination among the departments
involved in buying, receiving, inspecting, ciorage,
consuming and accounting.
b) Centralization of purchasing under the control of
competent buyer whenever possible.
c) Proper scheduling of material requirements.
d) Proper classification of materials with codes, material
standardization and simplification.
e) The operation of a system of internal check to ensure

40
 that all transactions involving materials and
equipment are checked by properly authorized and
independent persons.

f) The storage of materials is well planned and kept in

properly. Planned and kept in properly designated
location, subject to adequate safeguard and
supervision.

g) The operation of a system of perpetual inventory so

that it is possible to determine at any time, the
amount and value of each kind of material in stock.

h) A suitable method of valuation of materials is essential

because it affects the cost of jobs and the value of
closing stock of materials.

Objectives of Inventory Control:

The main objectives of inventory control are:

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

ii. To maintain a minimum investment in inventories to

maximize profitability.

iii. To ensure a continuous supply of raw materials to

facilitate uninterrupted production.

41
 iv. To maintain sufficient stocks of raw materials in
periods of short supply and anticipate price change.

v. Maintain sufficient finished goods inventory for

smooth sales operation and efficient customer
service.

vi. Minimize the carrying cost and time.

vii. Control investment in inventories and keep it at an

optimum level.

Advantages of Inventory Control:

The following are suggested advantages:

I. Eliminates wastage in use of material,
II. It reduces the risk of loss from fraud and theft.
III. It helps in keeping perpetual inventory and other
records to facilitate the preparation of accurate
material reports to management,
IV. To reduces the capital tied up in inventories,
V. It reduces cost of storage,
VI. It furnishes quickly and accurately the value of

42
 materials used in various department.
VII. It prevents delays in production due to lack of
materials by supplying, proper quantities at the right
time.

Disadvantages of Inventory Control:

Every firm has to maintain optimal level of inventories. It not

the following will be the result in form of losses.
I. Opportunity cost: Every firm has to maintain inventory for
that some investment is needed it is know as Opportunity
cost and handle the investment in inventory are more the
funds are blocks up with inventory.
II. Excessive inventories: It will lead to firm losses due to
excessive carrying costs and the risk of liquidity. It is also
referred as Danger level

III. Inadequate Inventory: it is another danger which results is

production hold-up and failure to meet delivery
commitments .In adequate raw materials and work -in
-process inventors will results in frequent production
interruptions .It finished goods are not sufficient customers
may shifts to competitors.

IV. Danger due to physical decoration: It is one of the reason

with the inventories due to maintaining stocks at high
levels they will be deteriorated due to passage of time,
some times due to mishandling or improper storage

43
 facilities.

Costs involved in inventory:

Every firms maintains inventory depending upon requirement
and other features of firm for holding such inventory some
cost will be incurred there are as follows:

(a) Carrying Cost;

This is the cost incurred in Keeping or maintaining an

inventory of one unit of raw materials, work-in -process or
finished goods. Here there are two basic cost involved.

(i) Cost of storage:

It includes cost of storing one unit of raw materials by the

firm. This cost may be for the storage of materials. Like rent
of spaces occupied by stock, stock for security, cost of
infrastructure, cost of insurance, and cost of pilferage,
warehousing costs, handling cost etc.

(ii) Cost of financing:

This cost includes the cost of funds invested in the

inventories .It includes the required rate of return on the
investments in inventory in addition to storage cost etc. The
Carrying cost include there fore both real cost and

44
opportunity cost associated with the funds invested in the
inventories.
The total carrying cost is entirely variable and rise in directly
proportion to the level of inventories carried.

Total carrying cost = (carrying Cost per unit) x (Average

inventory)

(b) Cost of ordering:

The cost of ordering includes the cost of acquisitions of

inventories. It is the cost of preparation and execution of an
order including cost of paper work and Communicating with
the supplier.
The total ordering cost is inversely proportion to annual
inventory of firm. The ordering cost may have a fixed
component, which is not affected by the order size: and a
variable component, which changes with the order size.

Total Ordering Cost = (No.Of orders) x (cost per

order).

(c) Cost of stock out:

45
It is also called as Hidden cost. The stock out is the situation
when the firm is not having units of an item in stores but
there is a demand for that Item either for the customers or
the production department .The stock out refers to zero level
inventory .So there is a cost of stock out in the sense that
the firm face a situation of lost sales or back orders .The
stock outs are quite often expensive. Even the good will of
firm also be effected due to customers dissatisfaction and
may lose business in case of finished goods, where as in raw
materials or work in process can cause the production
process to stop and it is expensive because employees will
be paid for the time not spend in producing goods.

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

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

and ordering cost)

Valuation of Inventory:

The methods of valuing inventory are combination of the

actual cost and replacement cost plans. The chief advantage

46
of the cost or net realizable value rule is that it is
conservative. Hence the methods of Valuation of inventory
are quite independent of system of mincing.

In balance sheet closing stock is shown under current assets

and is also credited to manufacturing or trading accounts.
The inventories are valued on the basis as follows.

 Cost of raw materials in stock may include freight

charges and carrying cost. But such cost should not
exceed market price,

 Work -in -process is generally valued at cost, which

includes cost of materials, labor. And the proportionate
factory overhead, as it is reasonable according to degree
of completion,

 Cost of finished goods wound normally to be total or full

cost it includes prime cost plus appropriate amount of
the overhead. Selling and distribution cost is deducted
on the other hand work in progress may be valued at
work in progress may be Valued at work cost, marginal
cost, prime cost or, even at direct materials.

ISSUE PRICING METHODS:

47
There are two categories:
(i) Cost prices:
(a) FIFO (First in First out)
(b) LIFO (last in first out)
(c) Specific price
(d) Base stock price
(e) HIFO (highest in first out)

(ii) Derived from cost prices:

(a) Simple average price
(b) Weighted average price
(c)Periodic simple average price
(d) Periodic weighted average price
(e) Moving simple average price
(f) Moving weighted average price

(iii) Notional prices:

(a) Standard price
(b) Inflated price
(c)Re-use price
(d) Replacement price

First in First out (FIFO)

This is the price paid for the material first taken into stock
from which the material to be priced could have been drawn.

48
Under this method stocks of materials may not be used up in
chronological order but for pricing purpose it is assumed that
items longest in stock are used up first. The method is most
suitable for use where in material is slow-moving and
comparatively high unit cost.

Advantages:

i. Price is based on actual cost and not on basis of

approximations such as no profits or losses arises by
reasons of adopting this method.
ii. The resulting stock balance generally represents fair
commercial valuation of stock.
iii. It is based on traditional principles.

Disadvantages:

i. The number of calculations in the stores ledger

involved tends to be complicated with increase in
clerical error.

ii. The cost of consecutive similar jobs will differ if the

price changes suddenly,
iii. In times of rising prices, the charge to production is
unduly low as the cost of replacing the material will
be higher.

49
  Last in first out (LIFO)

This is the price paid for the material last taken into stock
from which the materials to be priced could have been
drawn. This method also ensure material being issued at the
actual cost. Its use is based on the principle that costs
should be as closely as possible related to current price
level. Under this method production cost is calculated on
basis on replacement cost.

Advantages:

i. Production is charged at the most recent prices so that it

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

Disadvantages:

50
 i. Needs more clerical work.
ii. Compassion among similar jobs is very difficult.
iii. Stock valves relating to prices of the oldest cost on hand
may be entirely out of the current replacement prices.

 Weighted average price:

This is the price which is calculated by dividing the total cost

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

i. This method is advantageous where the price varies

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

51
Disadvantages:

This method is completed than simple average because it

takes into consideration the total quantities and total costs
in stock.
i. Profit or loss may be incurred as in simple average
price,
ii. As LIFO or FIFO this method calls for many
calculations,
iii. In order to calculate the accurate value of issues the
average price must normally be calculated to four to
five decimal places.
 Standard price:

It is the predetermination of fixed price on basis of a

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

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

Advantages:
i. This method is easy to operate.
ii. Comparing the actual prices with the standard price
will determine the efficiency of purchase department.

52
 iii. The effect of price variations is eliminated from job
costs.
iv. It reduces classical costs by eliminating detailed cost
records.
v. In times of inflation or price fluctuations is very
difficult to fix a standard price.
vi. This method also incurs a profit or loss on issues and
closing stock.

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

53
MATERIAL PURCHASING AND PURCHASING PROCEDURE

Purchase of material is one of the important function of material

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

Functions of Purchase Department

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

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

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

CENTERIZED PURCHASING
It is most important and relevant to large organizations operating
deferent plants may or may not be located at different places.
For a single place organization decentralization might be feasible

54
on a very limited place. But where as M & M Ltd., is a multiple
plants operating organization.

In Mahindra and Mahindra Centralized purchasing procedure is

following to purchase of materials.

 Centralized purchasing avoids duplications of efforts and

working at cross purpose from one plant to another.

 Centralized purchasing permits consolidation of order of

materials commonly used for two or more plants. The
ultimately results in greater buying power, favorable
contracts and trade agreements.

 Easier to maintain the quality of purchased parts / items

through centralized testing and inspection. It is also
possible to conduct testing and inspection facilities.

 Centralized purchasing permits to avail facilities like

quantity discounts and cash discounts thus its helps to
reduce cost.

 It is beneficial to vendor also in case the size of order

constituted major proportion of his total production
capacity

55
TECHNIQUES OF INVENTORY MANAGEMENT:

Main problems in inventory management are to answer.

(i) Are all items of inventory important if not what are

items to be given more importance?
(ii) What should be the size of the order for
replenishment be placed?
(iii) What should be the over level?

To answer these following techniques are used,

 Economic Order Quantity

 ABC Analysis
 VED Analysis
 RE-ORDER Level
 Safety Stock
 Just-in-time Inventory

56
ABC Analysis:
It is based on proposition that

(ii) Managerial items and efforts are scare and limited

(iii) Some items of inventory are more important than
others.

ABC ANALYSIS:

ABC analysis classifies various inventory into three sets or

groups of priority and allocates managerial efforts in
proportion of the priority the most important item are
classified into class-A, those of intermediate importance are
classified as "class-B" and remaining items are classified into
class-C'.
The financial manager has to monitor the items belonging to
monitor the items belonging to different groups in that order
of priority and depending upon the consumptions.

The items with the highest value is given top priority and
soon and are more controlled then low value item. The re-
rational limits are as follows.

57
Category % of Items % of total materials

A 5-10 70-85
B 10-20 10-20
C 70-85 5-10

Procedure:

(i) Items with the highest value is given top priority and
soon.
(ii) There after cumulative totals of annual value of
consumption are expressed as percentage of total
value of consumptions,
(iii) Then these percentage values are divided into three
categories.

ABC analysis helps in allocating managerial efforts in

proportion to importance of various items of inventory.

ECONOMIC ORDER QUANTITY:

After various inventory items are classified on the basis of

the ABC analysis the management becomes aware of the
type of control that would be appropriate for each of the
three categories of the inventory items.

58
The determination of the appropriate quantity to be
purchased in each lot to replenish stock as a solution to the
order quantity problems necessitates resolution of conflicting
goals. Buying in a higher average inventory level will assure.

(i) Smooth production / sale operation and

(ii) Lower ordering or setup costs. But it will involve
higher carrying costs. On the other hand small orders
would reduce the carrying cost of inventory by
reducing the average inventory level but the ordering
costs would increase, as there is a likelihood of
interruption in operations due to stock-outs. A firm
should not place either too high or small orders on
the basis of a trade off between benefits derived
from the availability of inventory and the cost of
carrying that level of inventory, appropriate or
optimum level of order to be placed should be
determined. The optimum level of inventory is
popularly referred to as the economic order quantity
or economic lot size. It may be defined as that level
of inventory order that minimizes the total lost
associated with inventory management. It is based
on some assumptions, which are restrictive.

a. The firm knows with certainty the annual usage of a

particular item of inventory.
b. Rate at which the firm uses inventory is steady over

59
 time.
c. The orders placed to replenish inventory stocks are
received at exactly that point in time when inventories
reach zero.
d.

 EOQ can be illustrated by

(i) Trial and error approach,

(ii) Mathematical approach.

 Trial and Error approach:

In this approach the procedure of procuring the inventory is

assumed the smaller the lot the lower is average inventory
and vice versa and high average inventory would involve
high carrying costs. This approach is used for determination
of EOQ uses different permutations and combinations of lots
of inventory purchases so as to find out the least ordering
and carrying cost combinations. The carrying cost and
acquisition cost for different sizes of order to purchase
inventories are computed and the order size with lowest total
cost of inventory is EOQ.

 Mathematical Approach:

60
The EOQ quantity can use a short-cut method calculated by
following
2AB
EOQ= EOQ =
C

Where,

A = Annual usage of inventory

B = Buying cost per order
C = carrying cost per unit

Limitations:

While using EOQ it should be noted that it suffers from

shortcomings, which are mainly due to the restrictive nature
of the assumptions on which it is based.

The important limitation is assumption of a constant

consumption usage and, the instant replenishment of
inventory is of doubtful validity

There may be unusual and unexpected demand for stocks to

meet such [contingencies the firm has to keen additional
inventories like safety stocks. Another weakness is to
assume known annual inventories is open to question and
there is likelihood of a discrepancy between the actual and
expected demand leading to wrong estimate of EOQ.

61
VED ANALYSIS:

Vital Essential and Desirable analysis is done mainly for

control of spare parts keeping in view of the criticality to
production.

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

THE RE-ORDER LEVEL:

The re-order level is the level of inventory at which the fresh

order for that item must be placed to procure fresh supply.
The re-order level depends upon

a) Length of time between the placement of an

order and receiving the supply.
b) The usage rate of the item. The inventory is
constantly being used up. The rate at which the
inventory is being used up. The rate at which
the inventory is being used up is called the

62
 usage rate.

The reorder level can be determined as follows:

R = M+tu
R = Reorder level
M = Minimum level of inventory
T = Time gap / delivery time
U = Usage rate

The reorder level and inventory patterns have be shown as

follows:

The figure shows that if the usage rate is constant, the

orders are made at even intervals for the same amounts
each time and the inventory goes to zero just before an
order is received.

63
Safety Stock:

The safety stock protects firm from Trade offs due to

unanticipated demand for the items level of inventory
investment is however increased by the amount of safety
stock. Safety level is ascertained in inventory as a part
because there is always an uncertainty involved in time lag
usage rate or other factor.

Usually smaller the safety level greater the risk of stock-

outs. If stock-levels are predictable then there is a chance of
stock out occurring. However stock inflows and outflows are
unpredictable or lesser predictable it becomes to carry
additional safety stock to prevent unexpected stock outs so

64
usage rate is estimated if cost is low then no safety stock is
needed.

JUST-IN-TIME INVENTORY:

The basic concept is that every firm should keep a minimum

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

JIT system significantly reduces inventory-carrying cost by

requiring that the raw materials be procured just in time to

65
be placed into production. Additionally the work in process
inventory is minimized by eliminating inventory is minimized
by eliminating inventory buffers between different
production departments.

If JIT is to be implemented successfully there must be a high

degree of coordination and co-operation between the
supplier and manufacturer and among different production
centers. JIT does not appear to have any relation with EOQ
however it is in fact alters some of the assumptions of EOQ
model. The average inventory level under the EOQ model is
defined as

Average inventory= 1/2 EOQ + safety level JIT attacks this

equation in two ways.
(i) By reducing the ordering cost
(ii) By reducing the safety stock.

The basic philosophy in JIT is that the benefits, associated

with reducing inventory and delivery time to a bare minimum
through adjustment in the EOQ model; will more than offset
the costs associated with the increased possibility of stock-
outs.

66
CHAPTER IV
DATA ANALYSIS
67
DETERMINATION OF STOCK LEVELS

Carrying of to much and too little of inventories is

determinate to the firm. If the inventory level is too little, the
firm will face frequent stock – outs involving heavy ordering cost
and if the inventory level of inventory where costs are the
minimum and at the same time their ID.No.Stock-out, which may
result in loss of sale or stoppage of production. Various stock
levels are discussed below.

MINIMUM STOCK LEVEL

This is the lower limit below which the stock of any item should
not normally be allowed to fall. This is also technically known as
safety or buffer stock. The prime considerations in fixing the
minimum stock level or safety stocks are :

a. Average rate of consumption.

b. Lead time.

68
Minimum Stock Level = Reordering level - (Normal
consumption X Normal Reorder Period)

Lead-Time :

A purchasing firm requires some time to process the order

and time is also required by the supplying firm to execute the
order. The time taken processing the order and the executing it
is known as lead-time. It is essential to maintain some inventory
during this period.

Reorder Level :

Reorder level is fixed between the minimum and maximum

levels. When stock of a material reaches at this point, the store
keeper should initiate action for the purchase of material. The
reorder level is slightly more than minimum stock level to guard
against

a. Abnormal usage
b. Abnormal delay in supply

Reorder level = Maximum consumption X Maximum

period required
during the period for
delivery

MAXIMUM STOCK LEVEL :

Maximum stock level represents the upper limit beyond

which the quantity of any item is not normally allowed to rise.
The main object of establishing this limit is to ensure that
unnecessary working capital is not blocked in stores.
Theoretically, maximum stock level is the sum – total of minimum
stock level and economic order quantity.

69
Maximum level = Reorder Level + Reordering quantity –
Minimum consumption.

AVERAGE STOCK LEVEL :

The average stock level is calculated as such :

Average stock = minimum stock level + ½ of re-order

quantity.

DANGER LEVEL :

This is generally fixed below the minimum stock level.

Normal stock should not be below the minimum level. If it
reaches the danger level at any point of time, urgent action for
replenishment of stock must be taken to prevent stock out.

ESTIMATION OF STOCK LEVELS :

There are different techniques used in the calculation of the stock

levels.

Reordering Quantity - 2500 units

Reordering Period - 4 – 5 weeks

Weekly usage :-
Maximum usage - 900 units
Normal usage - 700 units
Minimum usage - 500 units

Reordering Level = Maximum consumption X Maximum

Reordering Period
= 900 X 5 = 4500 units.

Ex :- Consider “Load King” for calculation purpose.

Calculated of the load king compressor as 500 units.

70
Normal Daily consumption = 700 units
Normal Reorder period = 4.5 weeks
Reorder level = 4500 units
Minimum usage = 500 units
Minimum Reorder period = 4 weeks
Maximum Reorder period = 5 weeks

MINIMUM STOCK LEVEL

= Reorder Level – (Normal consumption X Normal

Reorder Period)
= 4500 – (700 X 4.5)
= 4500 – 3150
= 1350 Units

MAXIMUM STOCK LEVEL

= Reorder Level + Reorder Quantity – (Minimum

consumption X
Minimum Reorder
Period)
= 4500 + 2500 – (500 X 4)
= 7000 – 2000
= 5000 Units

AVERAGE STOCK LEVEL

71
 = Minimum stock + ½ of Reordering Quantity.
= 500 + (½ X 2500)
= 500 + 1250
= 1750 Units

Minimum Stock Level = 1350 Units

Average Stock Level = 1750 Units
Maximum Stock Level= 5000 Units

INVENTORY TURN OVER RATIO

“A Ratio which measures the number of times a firms

average inventory is sold during a year” – Kohler.

Computation of inventory turn over ratios for different items

of materials and comparison of the turnover ratios provide a
useful guidance for measuring inventory performance. A high
turnover rate indicates that the material in question is a fast
moving one. A low turnover rate on the other hand indicates
over investments and looking up of working capital on
undesirable items.

“Inventory or Stock turnover is measured in terms of the

ratio of the value of materials consumed to the average inventory
during the period”. The ratio indicates the number of time the
average inventory is consumed and replenished by dividing
number of days for which the average inventory is held can be
ascertained.

Comparing the number of days in the case of two different

materials, it is possible to known which is fast moving and which
slow on that basis attempt may be made to reduce the amount of
capital locked up and prevent over stocking of slow moving
items.

72
Average Inventory = Opening Stock + Closing Stock
2

Inventory turnover ratio = Material consumed

Average Inventory

Inventory turnover in number of days = Number of

days in a year
Inventory turnover ratio

INVENTORY TURNOVER RATIO

Cost of goods sold

INVENTORY TURNOVER RATIO =------------------------------
Average inventory

(Rs in 000’s)
Year Cost of goods Average Ratio
sold inventory
2002-03 2563442 358048 7.16
2003-04 2210210 439610 5.03
2004-05 2163508 528333 4.09
2005-06 2484589 596074 4.17
2006-07 3044561 697949 4.36
2007-08 4120957 1008066 4.09

73
 Ratio

9
8
7
6
5
4 7.76 Ratio
3
5.03
2 4.09 4.17 4.36 4.09
1
0

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

INVENTORY HOLDING RATIO

365
INVENTORY HOLDING RATIO=---------------
Inventory turnover ratio
(Rs in 000’s)
Year Days Inventory turn Inventory
over ratio holding ratio
2002-03 365 7.16 51
2003-04 365 5.03 73
2004-05 365 4.09 89
2005-06 365 4.17 88
2006-07 365 4.36 84
2007-08 365 4.09 89

74
 Inventory holding ratio

100
90
80
70
60
50
89 88 84 89 Inventory holding ratio
40 73
30
51
20
10
0

2002- 2003- 2004- 2005- 2006- 2007-

03 04 05 06 07 08

INVENTORY ANALYSIS AT TECUMSEH INDIA PRODUCTS PVT.LTD

(Rs in 000’s)
Year Inventory Current assets % in inventory
&CA
2002-03 495036 909946 54.40
2003-04 561630 1078274 52.09
2004-05 630518 1500977 42.01
2005-06 765380 1688733 45.32
2006-07 1250752 2307604 54.20
2007-08 1312456 2504689 55.23

75
 % in inventory &CA

60

50

40

30 % in inventory &CA
54.4 52.09 54.2 55.23
20 42.01 45.32

10

0
1 2 3 4 5 6 7 8

YEARS 2008 2007 2006 2005 2004 2003

Opening
4997 4567 4690 5525 5155
Inventory 43697
0 5 4 3 4
(Rs. In Lakhs)
Closing Inventory 7598 4997 4567 4690 5525
(Rs. In Lakhs) 51554
3 0 5 4 3

INVENTORY TURNOVER RATIO

INVENTOR
INVENTOR AVERAGE
INVENTOR Y
Y INVENTOR
Y TURNOVE
YEARS CONSUME Y
TURNOVE R IN
D (Rupees (Rupees in
R RATIO NUMBER
in Lakhs) Lakhs)
OF DAYS

76
 49970 +
459537.10 365..
March – 75983
459537.10 62976.5 7.296
2008 2
= 7.296 = 50.027
= 62976.5
45675 +
335286.52 366..
March – 49970
335286.52 47822.5 7.01
2007 2
= 7.01 = 52.21
= 47822.5
46904 +
250021.84 365..
March – 45675
250021.84 46389.5 5.389
2006 2
= 5.389 = 67.73
= 46389.5
55253 +
211723.1 365..
March – 46904
211723.1 51078.5 4.24
2005 2
= 4.145 = 88.05
= 51078.5
51554 +
235858.13 365..
March – 55253
235858.13 53403.5 4.41
2004 2
= 4.416 = 82.65
= 53403.5
53697 +
221023.23 366..
March – 51554
221023.23 47625.5 4.64
2003 2
= 4.64 = 78.87
= 47625.5

77
 INVENTORY TURNOVER RATIO

8 7.01 7.296
7
6 5.389
4.64 4.416
5 4.145
4
INVENTORY

3
2
1
% OF

0
2003 2004 2005 2006 2007 2008

YEARS

INVENTORY TURNOVER RATIO

INVENTORY TURNOVER RATIO

8
7 7.01 7.296
% OF INVENTORY

6
5 5.389
4.64 4.416
4 4.145
3
2
1
0
2003 2004 2005 2006 2007 2008

YEARS

INVENTORY TURNOVER RATIO

78
 INVENTORY IN NUMBER OF DAY
100 88.05
78.87 82.65
NVENTORY IN NUMB

80 67.73
60 52.21 50.027
40
20
0
F DAY
RO

2003 2004 2005 2006 2007 2008

E

S
I

YEARS

INVENTORY IN NUMBER OF DAY

79
 INVENTORY IN NUMBER OF DAY
100
88.05
INVENTORY IN NUMBER OF DAYS

80 78.87 82.65
67.73
60
52.21 50.027
40
20
0
2003 2004 2005 2006 2007 2008

YEARS

INVENTORY IN NUMBER OF DAY

INERPRETATION:

A high turnover ratio indicates that the material in question is a

fast moving one and also a low amount of stocks are replacing
stocks in large number of installment. In the year 2006, 2007,
2008, the stock turnover ratio is gradually decreasing and the
inventory faced a bad position in these three years. And from
2003, 2004, 2005, the stock turnover ratio continuously
increased from 5.38 to 7.296 and the inventory in number of
days is low. This position indicates that the stocks are fast
moving and get converted in to sales quickly.

80
COMPRESSOR PRODUCTION AND DISPATCH

COMPRESSOR COMPRESSOR
PRODUCTION DISPATCH
YEAR
(QUANTITY IN (QUANTITY IN
MIL.UNITS) MIL.UNITS )
MARCH 31ST 2006 25,797 25,416
MARCH 31ST 2007 34,186 33,766
MARCH 31 ST
2008 33,630 33,885

COMPRESSOR PRODUCTION & DISPATCH

TI

&
O

O
R

D
U
C

N
P

40000
35000
30000
25000
20000 Production
15000 Dispatch
10000
5000
DISPATCH

0
2006 2007 2008

YEARS

81
INERPRETATION:

The inflow of raw materials and dispatch of finished goods from

the organization is in good position. In march 31st 2006 the
difference between the compressor production and dispatched is
381 and in march 31st 2005 the close stock in the go down is also
dispatched from the organization and as well as in the year 2007
31st march the stored compressors are dispatched from the
company. This indicates that the consuming storage cost is very
low and risk related to preservation of the stock is very less.

82
CHAPTER V
FINDINGS

83
FINDINGS

On the personnel interaction with the financial department as

well as with the primary and secondary arrived they are :
1. The analysis is carried out for a period of five years i.e
2003-2004 to 2007-2008 is not sufficient to conclude the
inventory positions of the company as well taken up to
study for a period of 6 weeks Is too less still we strived
out best in exploiting the present inventory positions of
the company
2. Inventory valuations is followed in weighted average
method based on cost concept of the project costing is
undertaken.
3. The inventory is different items of production hence ABC
analysis and two bin system are followed
4. Some items are found to be slow and non moving the
slow moving items are spare and consumable goods
hence whenever necessary arises these items are being
used non moving items are also found in the inventory.
5. The reasons for non moving of inventory from stores are
studied. Due to MOQ(Minimum order quantity) clause
these items procured extra than the requirement.

6. The high inventory turnover ratio at indicates efficiency

of the firms inventory management
7. The material consumption was also increasing
simultaneously with sales.

84
8. The company s efficiency in turning its inventory is
increasing. The companies utilization of inventory in
generating sales is good they yearly holing of all types of
inventory is decreasing this is positive trend
9. The company efficiency in turning the inventory is
increasing the company’s utilization of inventory in
generating sales is good the yearly holing of all types of
inventory is decreasing this is positive trend.
10. The over all inventory position of the company is
satisfactory.

85
 CONCLUSIONS

CONCLUSIONS

86
 To days business scenario inventory management is
becoming very crucial part of the organization. The system of
inventory management in Tecumseh India products private
limited very effective. The organization is basically and
assembling unit and thus inventory place a most significant role
in the decision making process. From the various calculations
and figures relating to inventory management it is clear that the
inventory classification of A items are maintain for 1 – 3 days, as
a result it reduce investment in raw material, reducing the lead
time and also the large quantity discount because the stock are
kept for 1 – 3 days.

In the classification of ABC items XYZ procedure is following

in Tecumseh Plant has launched the different type of KANBAN
card system for class C items.

Class A & B items are consider under the just in time

philosophy as the procurement time has been reduced up to
greater extent by the proper co-ordination of buyer and supplier.

There is great improvement in the inventory turnover ratio

from 3 years. It is increased from 5.38 to 7.296% this position
indicates that the stocks are fast moving and get converted into
sales quickly in Tecumseh India Products Private Limited

Finally we conclude that Tecumseh India products Private

limited plant the inventory system is very good with high
Japanese techniques.

87
 BIBLIOGRAPHY

BIBLIOGRAPHY :

88
* Cost Accounting – V.K. Saxena
C.D. Vashist
* Cost Accounting - S.P. Iyenger

* Cost Accounting - S.N. Maheshwari

* Financial
Management - Khan & Jain

* Cost Management
Accounting - R.P. Thrivadi

Websites:

www.google.com
www.yahoofinance.com
www.Tecumseh.com
www.msn.com

89