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Inventory Management

INTRODUCTION
Inventory management is concerned with keeping enough products on hand to avoid running out while at the same time maintaining a small enough inventory balance at allow for a reasonable return on investment, proper inventory management is important to the financial health of the corporation, being out of stock forces customers to turn to competitors or results in a loss of sales excessive level of inventory, however results in large inventory carrying costs, including the cost of the capital tied up in inventory where house fees insurance etc. The objective of the chapter is to examine the impact of inventory on the financial decision making. Inventories constitute the most significant part of current asserts of a large majorities of companies in INDIA. On an average inventories are approximately 60% of current asserts in public limited companies in INDIA. Because of the large size of inventories maintained by firms, a considerable amount of funds is required to be committed to them. The investment in inventory is very high in most of the undertaking engaged in manufacturing wholesale and retail trade. The amount of investment is sometimes more in Inventory rather 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 is 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. The investment in inventory is very high in most of the undertaking engaged in manufacturing wholesale and retail trade. The amount of investment is sometimes KOTTAM KARUNAKARA REDDY INSTITUTE OF TECHNOLOGY

Inventory Management

more in Inventory rather 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 is 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. Hence, the inventory management determines and portrays the following factors like what to purchase, how to purchase, from where to purchase, where to store etc., will be critical factors. Hence forth it becomes a crucial factor to undergo a detailed analysis to find an efficient system of the inventory. As an attempt has been made to study the inventory management with reference to PHILLIPS INDIA (P) LTD. DEFINITION: The American production and inventory society defines: Inventory management as the branch of business management concerned with planning and controlling inventories. The role inventory management is to maintain a desired stock level of specific products or items. NEED FOR THE STUDY: To facilitate smooth production and sales operation (Transaction motive). To guard against the risk of unpredictable changes in usage rate and delivery time (Precautionary motive ) To guard against the risk of unpredictable changes in usage rate and delivery time (Precautionary motive ) To take advantages of price fluctuations(Speculative motive)

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SCOPE OF THE STUDY: Work in progress arising under construction contracts including directly related service contract. Work in progress arranging in ordinary course of business of services provides.

OBJECTIVES: To maintain a large size of inventory of raw material and work in progress for efficient and smooth production and of finished goods for uninterrupted sales operations. To maintain a minimum investment on inventory to maximise profitability. Study of maintain optimum level of inventory investment. The primary goal is to minimize inventory investment while still meeting the functional requirements.

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Inventory Management

METHODOLOGY AND DATABASE:


For this project the collection of data is by various sources. Mainly Primary Secondary

PRIMARY DATA: The information collected directly without any reference in primary data in the study it is mainly through concerned offers or staff member either individually or collectively data includes Conducting personal interview with officers of the company. Individual observation inference. From the people who are directly involved with the transaction of the firm. SECONDARY DATA: Study has been taken from secondary sources that is published annual report of the editing, classifying and tabulation of the financial data for their.

PERIOD OF THE STUDY: This study is confined for the period of approximately Three months that is from 9th May 2011 to 15th June 2011.

STATISTICAL TOOL TO BE APPLIED: Sampling statistical techniques like percentages, bar graphs, averages, chisquares, and z-test may be applied based on the data collected for the study.

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Inventory Management

TOOLS AND TECHNIQUES OF INVENTORY MANAGEMENT:

Effective inventory management requires an effective control system for inventories. A proper inventory control not only helps 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: Determination of stock levels. Determination of Safety Stocks. Selecting a proper system of Ordering for Inventory. Determination of Economic Order Quantity. A.B.C. Analysis. Inventory Turnover Ratios (Conversion period) Classification and Codification of Inventories. Preparation of Inventory Reports. Determination of stock levels. Determination of safety stock levels. Selecting a proper system of ordering for inventory. Determination of economic order quantity (EOQ) A.B.C. Analysis.

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Inventory Management

LIMITATIONS: First there is a cost of information problem in keeping track of the physical inventories of some goods Second because of number of variables involved it is very difficult to develop on accurate measure of inventory turnover. The very nature of the organization places limitations on the collection of the data and analysis thereof. The accounting procedure and other accounting principles are limited by the company changes in them may vary the inventory performance. The study is limited up to the date and information provided by PHILLIPS INDIA (P) LTD. and annual reports.

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Inventory Management

INDUSTRY PROFILE

Black & white Televisions have been in the Indian market from the inception of TV into the Indian market. After two decades entered the colour TVs which now has become an essential household appliance. Television industry is being invaded by many companies, however, a few have emerged as the market leaders. These Philips, BPL, Onida, Videocon, Sansui, LG, etc. There is a slump in the sales of colour Televisions during the past quarter year. Analysis and research work is being done to find out reasons for the sudden slump of sales. Philips India Ltd, which is one of the leading brands in CTV industry, is also engaged to find out the reasons behind the slump and analyze the importance of various sales promotional schemes, which increases the sales of colour TVs. CTV industry consists of many companies such as Philips, BPL, Onida, Sansui, Videocon, LG, etc. the B\W TVs and CTVs are categorized as two separate segments of the industry. The market shares held by various branded and unbranded CTVs are given below. Philips India Ltd. Enjoys a market share of 12% in the entire B\W TV industry. BPL enjoys market share of 14%, Videocon a share of 4%, Onida with 13% market share and Sansui with a share of 6%$ and the remaining market is captured by other brands.

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Inventory Management

The World Consumer Electronics Industry Guide is an important source for exclusive data and analysis that covers the consumer electronics industry. The electronics industry is very dynamic and new products are launched everyday in the consumer electronics sector. The demands of the consumers are ever increasing and the companies are using state-of-the-art technologies to stay in the competition. The ever-changing electronics sector holds a great potential not only for the new-entrants, but also for the existing industry giants. The Industry Analysis report that we have prepared looks at all the elements that can affect any companys fortunes positively. Our report sheds light on all the industrys players, new as well as old. The information includes the positioning of every player in the competitive environment. The strategies, future plans, and market positioning are assessed for every industrial player. Our report can help in analyzing and identifying the potential areas that can be exploited by both the existing and the new entrants in the sector. An industry analyst can utilize the data that we provide, which covers the comparative data from previous years along with the current year (2005). The data includes a tabulated version of the total shipment value of the consumer electronics, along with the number of companies that report the shipments by the product codes and class. A table that compares the domestic outputs, imports and exports is also given in the report. Our industry analysis report is an indispensable and a valuable tool that can be used by company analysts, decision makers, and the ones who wish to enter this industry. The existing operators can also identify the areas that can be tapped.

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Inventory Management

Overview The consumer electronics industry manufactures and distributes everything from stereo components, televisions, VCRs, and DVD and MP3 players basically, everything you see when you go into a Best Buy or Circuit City store. (Some industry observers also include desktop and laptop PC manufacturers as part of the industry.) Needless to say, consumer electronics is big business. In 2005, in the U.S. alone, consumers spent more than $75 billion on consumer electronics products, 8 percent more than in 2004. The industry employs a host of engineers, designers, marketers, salespeople, customer service reps, and finance gurus to continually improve familiar products as well as come up with the next big must-have gadget. Although much of the actual manufacturing of consumer electronics products is done in Asia and other low laborcost locations, there are many career opportunities in the industry in the United States. On the technical side, opportunities exist for software and electronics engineers, quality assurance engineers, industrial designers, manufacturing design engineers, and IT professionals. If you're a people person or if you can design a marketing campaign, close a distribution deal with a major retail chain, write marketing copy, or help a confused consumer understand a complex product, consumer electronics companies may be good places for you, too. You can earn your stripes at a multinational corporation like Samsung or Mitsubishi, where big money backs big products such as high-definition television (HDTV). Or you can try your hand at a startup that's pushing the consumerelectronics envelope in one market niche or another. So before you start your job search, think about whether you like the structure and resources (and bureaucracy) KOTTAM KARUNAKARA REDDY INSTITUTE OF TECHNOLOGY

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that a big organization will have or prefer the flexibility and cutting-edge spirit (and bare-bones budget) of a younger, smaller company.

Job seekers should also keep in mind that many consumer electronics products are global brands, so many companies have opportunities for international positions and travel, and foreign language skills are often highly desirable. And in the United States, though there is some concentration of consumer electronics jobs on the East and West Coasts, the industry is sprawled across the country. Many of the large companies have multiple offices to choose from, with each location housing a different product line or corporate function. These days, because so many consumer electronics products rely on semiconductors for their functionality, Moore's Law, which states that semiconductor speed doubles every 18 months, applies just as much to the consumer electronics industry as it does to computer hardware. Because of this, consumer electronics companies are developing new and improved products all the time. If you're one of the many consumers who need to have the latest and greatest gadgets, it's going to cost you a pretty penny to stay on the cutting edge. But if you don't need top-of-theline consumer electronics products if you're happy with getting a 4-megapixel digital camera, for instance, and are prepared to leave the 8-megapixel camera to the hardcore gadget-heads just wait a little while, and the price on the product thats right for you will almost certainly decrease substantially.

As usual in consumer electronics, these days there are a number of cool, new products on or about to reach electronics store shelves. For instance, to take advantage of the improved sound offered by digital radio, many of the big electronics makers are bringing digital home and car radios to market. Digital cameras, meanwhile, are increasingly likely to include significant digital video recording capability. And there KOTTAM KARUNAKARA REDDY INSTITUTE OF TECHNOLOGY

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are refrigerators on the market with TV screens embedded in them, which you even can use to surf the Net. Satellite TV in your car; satellite radio systems that give you live, up-to-the-minute reports on traffic conditions; handheld media-storage devices; live TV on your cell phone the list of innovative new consumer electronics products already on or about to hit the market goes on and on.

COMPANY PROFILE
The company was founded in 1891 by Gerard Philips, a maternal cousin of Karl Marx, in Eindhoven, Netherlands. Its first products were light bulbs and other electro-technical equipment. Its first factory survives as a museum devoted to light sculpture. In the 1920s, the company started to manufacture other products, such as vacuum tubes (also known worldwide as 'valves'), In 1927 they acquired the British electronic valve manufacturers Mullard and in 1932 the German tube manufacturer Valvo, both of which became subsidiaries. In 1939 they introduced their electric razor, the Philishave (marketed in the USA using the Norelco brand name). Philips was also instrumental in the revival of the Stirling engine.

Philips Radio

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On 11 March 1927 Philips went on the air with two shortwave radio stations, PHOHI broadcasting in Dutch to the Dutch East Indies (now Indonesia) and PCJJ (later PCJ) which broadcast in English, Spanish and German to the rest of the world. The international program on Sundays commenced in 1928 with host Eddie Startz hosting the Happy Station show which became the world's longest running shortwave program. Broadcasts from the Netherlands were interrupted by the German invasion in May 1940. The transmitters in Huizen were commandeered by the Germans and used for pro-Nazi broadcasts, some originating from Germany, others concerts from Dutch broadcasters under German control. Philips Radio did not resume after Liberation. Instead the two shortwave stations were nationalised and became Radio Netherlands Worldwide, the Dutch International Service in 1946 though PCJ programs such as Happy Station continued on the new station. PHILIPS IN INDIA Philips started operations in India at Kolkata (Calcutta) in 1930 under the name Philips Electrical Co. (India) Pvt Ltd, comprising a staff of 75. It was a sales outlet for Philips lamps imported from overseas.

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In 1938 ,Philips India set up its first Indian lamp-manufacturing factory in Kolkata. After the Second World War in 1948, Philips started manufacturing radios in Kolkata. In 1959, a second radio factory is established near Pune.

In 1957, the company is converted into a public limited company, renamed "Philips India Ltd". In 1965 on 3 April, the millionth Philips radio is manufactured in India. In 1970 a new consumer electronics factory is started in Pimpri near Pune. (This factory was shut down in 2006.) In 1982, Philips brought colour television transmission to India with the supply of four outdoor broadcast vans to DD National during the IX Asian Games.

In 1996, the Philips Software Centre was established in Bangalore (It is now called the Philips Innovation Campus). In 2008, Philips India entered a new product category, water purifiers designed and made in India, and exported to other countries. As of 2008, Philips India has about 4,000 employees.

Philips India Ltd. Has broadly classified its areas of production under consumer electronics in which it is enjoying a share of 33% in the entire industry and domestic appliances, a share of 20%. Lighting has a share of 35% and industrial equipment a share of 12% in the entire industry in the consumer electronics segment, Philips India Ltd. Deals with B\W TV, CTV and Audio Systems.

In the colour TV segment it enjoys a share of 6 and B\W a share of 12% in the entire industry. In the Audio Systems segment it enjoys a market share of 35%. Philips Electronics India, Indias largest lighting company operates in business areas of Lamps, Luminaries, Lighting Electronics, Automotive and Special Lighting. Today, as global leader in Lighting, Philips is driving the switch to energy-efficient KOTTAM KARUNAKARA REDDY INSTITUTE OF TECHNOLOGY

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solutions. With worldwide electrical lighting using 19 per cent of all electricity, the use of energy-efficient lighting will significantly reduce energy consumption around the world.

Philips provides advanced energy-efficient solutions for all segments: road lighting, office & industrial, hospitality and home. Philips is also a leader in shaping the future with exciting new lighting applications and technologies such as LED technology, which, besides energy efficiency, provides attractive benefits and endless new never-before-possible lighting solutions.

In 2008, Philips inaugurated a global research and development (R&D) centre for lighting electronics in India. This was its third such unit in the world. The facility which is situated in Noida will not only cater to the needs of the Indian market but also the Asia-Pacific, Europe and North America. The other R&D centres are located at Eindhoven in the Netherlands and in Shanghai, China.

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INVENTORY MANAGEMENT
INTRODUCTION: The investment in inventory is very high in most of the undertakings engaged in manufacturing, whole-sale and retail trade. The amount of investment is sometime 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 labour and overheads is 36 paisa in rupee. In Industries like sugar, the raw materials cost is a s high as 68.75 percent of the total of cost. About 90 percent part of working capital is invested in inventories. It is necessary for every management to give proper attention to inventory management. A proper planning of purchasing, handling, storing and accounting should form a part of inventory management. An efficient system of inventory management will determine (a) what to purchase (b) how much to purchase (c) from where to purchase (d) where to store, etc. There are conflicting interests of different departmental heads over the issue of inventory. The finance manager will try to invest less in inventory because for him it is an idle investment, whereas production manager will emphasize to acquire more and more inventory as he does not want any interruption in production due to shortage of inventory. The purpose of inventory management is to keep the stocks in such a way that neither there is over-stocking nor under-stocking. The over-stocking will KOTTAM KARUNAKARA REDDY INSTITUTE OF TECHNOLOGY

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mean a reduction of liquidity and staring of other production processes; understocking, on the other hand, will result in stoppage of work. The investments in inventory should be kept in reasonable limits. Every enterprises needs inventory for smooth running its activities. It serves as a link between production and distribution processes. There is, generally, at a time lag between the recognition of a need and its fulfillment. The greater the time-lag, the higher the requirement for inventory, the unforeseen fluctuations in demand and supply of goods also necessitate the need for inventory. It also provides a cushion for future price fluctuations. The investment in inventories constitutes the most significant part of current assets/working capital in most of the undertakings. Thus it is very essentials to have proper control and management of inventories. The purpose of inventory management is to ensure a variability of materials in confident quantity as and when required and also to minimize Investment in inventories. Meaning and Nature of Inventory: Supply of goods or materials on hand. In manufacturing, inventory consists of raw materials, work-in-process, and finished goods. In wholesaling and retailing, inventory is the stock of merchandise on hand. In direct marketing, inventory may refer to direct-mail package components that are available for mailing when needed. In the broadcast and print media industry, inventory is the time or space available for mailing when needed. In the broadcast and print media industry, inventory is the time or space available for sale to advertisers. In magazine publishing, inventory is the number of copies of each issue available for distribution. An ample inventory ensures that sales will not be lost or deadlines missed but can require a substantial cash investment in both material and storage space. There are also risks associated excessive inventory, such as a change in circumstances that reduces or eliminates demand for an item in inventory or that renders the item KOTTAM KARUNAKARA REDDY INSTITUTE OF TECHNOLOGY

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obsolete or illegal, or the risk of loss due to theft, fire, aging, and so forth. The costs and risks must be weighed against the cost of lost sales and missed deadlines to determine the optimal inventory level.

INVENTORY CONTROL AND ITS IMPACT ON COSTS: Value wise inventory and consumption analysis are brought out on quarterly basis indicating RM; SS, CT, PM are value at cost. A class items which are 70%, B class items which are valuing 20% and C class items which are valuing 10%. Of the total inventory are brought for verification of internal audit. The stores verified C class items and to that extent certificate 4 is issued at the year end regarding the correctness. Physical balances are verified with kardex and the difference is intimated to stores FAW of the group by the internal audit. FAW of the group verifies and gives the rectification in entries that is shortage items values are charged of to physical inventory variation and the excess quantities are adjusted in the inventory ledger after obtaining the competent authorities approval. This system enables control on the inventories and at the same time costs on some are checked. Materials issued to subcontractors are booked to consumptions as and when issued through MIRS. A record is being maintained at subcontracts section, park wise, job wise and description of materials and quantities issued.

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Impact of inventory on working capital Inventories are a component of the firms working capital and, as such, represent a current accounting cycle, which is normally one year. 1. 2. A CURRENT ASSET: It as assumed that inventories will be LEVEL OF LIQUIDITY: inventories are viewed a source of

converted to cash in the current accounting cycle, with is normally one year. near all cash. For most products, this description is accurate, at the same time most firms hold some slow moving items that may not be sold for a long time. With economic slows down or changes in the markets for goods the 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. LIQUIDIRY LAGS: inventories are tied to the firms pool of the working capital in a process that involves three specific lags. Creation lags: It most cases, inventories are purchased on credit, creating an account payable. When the raw materials are processed in the factory, the case to pay production expenses is transferred at future times. Whether manufactured or purchases, the firms will hold inventories for some period before payment is made. This liquidity lag offers a 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 sale are moving briskly, affirm will hold inventory as a backup. Thus the firm will usually pay suppliers, workers and overhead expenses before the goods actually sold. This lag represents a cost to the firm. Sale lag: once goods have been sold, they normally do not create cash immediately. Most sales occur on credit and become accounts receivable. This lag also represents a cost to the firm.

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4. CIRUCLATING ACTIVITY: inventories are in rotating pattern with other current asset. They get converted into receivables which generate cash is invested again in inventory to continue the operate cycle. NEED TO HOLD INVENTORY Maintaining inventories involves tying up of the companys funds and incurrence of storage and handling costs. There are three are 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. transact nary motive makes the firm to keep the inventory will provide smoothness to the operation of the firm. A business firm exists for business transaction that requires stock of goods and raw materials. 2. Precautionary motive: a firm should keep some inventory for unforeseen circumstances also. The firm must have inventory of raw materials as will as finished goods for meeting any emergencies. 3. Speculative motive: the firm may be empted 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 expected shortage in the market. MAIN PURPOSE OF INVENTORY The purpose of holding inventories is to allow the firm to operate the processes of purchasing, manufacturing and marking in its primary products. The goal is to achieve efficient in are where costs are involved and to achieve sales at competitive prices in the marking place. 1. Avoiding loss sales: Without goods on hand that are ready to be sold most firms would lose business. Some clusters are ready to wait, particularly when an item must be made on order or is not widely available from competitors. Affirm must be prepared to deliver goods on demand. Shelf stock refers to KOTTAM KARUNAKARA REDDY INSTITUTE OF TECHNOLOGY

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items that are stored by the firm and sold with little or no modification to the customers. 2. Gaining quantity discounts: Inurn for making bulk purchases many suppliers will reduce the supplies and component parts. This discount will reduce cost of goods sold and increase the profits earned. 3. Reducing order cost: each time a firm place an order it incur certain good that arrive must be accepted, inspected and counted. Later an invoice must be processed and payment made. Each of these costs will vary with the order placed. By placing fewer orders the firm will pay less to process each order. 4. Achieving efficient production runs: each time a firm sets up workers and machines produce an item startup cost are incurred. These are the absorbed as production begins. The longer the run the smaller the costs to begin producing the goods. 5. Reducing risk of production shortages: manufacturing firm frequently produce goods with blunders or thousands of components. If any these are missing entire production operation can be halted with heavy expenses. To avoid starting a production run and then discovering the shortage of vital raw material or other component, the firm can maintain larger than inventories. Basically, inventory management is concern of stores management, production management is concerned. In case of raw material, the stores management and production management is concerned. In case of finished goods, production and sales management is concerned. INVENTORY-CORPORATE FINANCE: Value of a firms raw materials, work in process, supplies used in operations, and finished goods. Since inventory value changes with price fluctuations, it is important to know the method of valuation. There are a number of inventory valuation methods; the most widely used are First In, First out (FIFO) and Last In, First out (LIFO). Financial statements normally indicate the basis of inventory valuation, generally the lower figure of either cost price or current market price, which precludes

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potentially overstated earnings and assets as the result of sharp increases in the price of raw materials. Personal finance; List of all assets owned by an individual and the value of each, based on cost, market value, or both. Such inventories are usually required for property insurance purpose and are sometimes required with applications for credit. Securities: Net long or short position of a dealer or specialist. Also, securities bought and held by a dealer for later resale. Inventory: An inventory is a detailed, itemized list or record of goods and materials in a companys possession. The main components of inventory, wrote Transportation and Distribution contributors David Waller and Barbara Rosenbaum, are cycle stock: the order quantity or lot size received from the plant or vendor; in-transit stock: inventory in shipment from the plant or vendor or between distribution centers; [and] safety stock: each distribution centers inventory buffer against forecast error and lead time variability. Writing in production and Operations Management, Howard J. Weiss and Mark E. Gershon observed that, historically, there have been two basic inventory systems and the periodic review system. With continuous review systems, the level of a companys inventory is monitored at all times. Under these arrangements, business typically track inventory until it reaches a predetermined point of low holdings, whereupon the company makes an order (also of a generally predetermined level) to push its holdings back up to a desirable level. Since the same amount is ordered on each occasion, continuous review systems are sometimes also referred to as eventtriggered systems, fixed order size systems (FOSS), or economic order quantity systems (EOQ) .Periodic review systems, on the other hand, check inventory levels at fixed intervals rather than through continuous monitoring. These periodic reviews (weekly, biweekly, or monthly checks are common) are also known as time triggered KOTTAM KARUNAKARA REDDY INSTITUTE OF TECHNOLOGY

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systems, fixed order interval systems (FOIS), or economic order interval systems (EOI). The dictionary meaning of inventory is stock of goods, or a list of goods. The word Inventory is understood differently by various authors. In accounting language it may mean stock of finished goods only. In a manufacturing concern, it may include raw material, work in process, etc. to understand the exact meaning of the word, inventory we may study it from usage side or from the side of point entry in the operations. Inventory includes the following things: Raw Material: Unfinished goods used in the manufacture of a product. For example, a steelmaker uses iron ore and other metals in producing steel. A publishing company uses paper and ink to create books, newspapers, and magazines. Raw materials are carried on a companys balance sheet as inventory in the current assets section.

WIP (Work In-Progress): Three-letter abbreviation with several meanings, as Described below: Work in Progress- generally signifies a project that will not be settled in one attempt, or even several. Sometimes as WIP List, synonymous with a To-Do list. WIP as an asset means the portion of work that is complete but not yet billed. WIP is a good or goods in various stages of completion throughout the plant, including all material from raw material that has been released for initial processing up to completely processed material awaiting final inspection and acceptance as finished good inventory. Finished Goods: These are the goods which are ready for the consumers. The stock of finished goods provides a buffer between production and market. The propose of maintaining inventory is to ensure proper supply of goods to customers. In some concerns the KOTTAM KARUNAKARA REDDY INSTITUTE OF TECHNOLOGY

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production is undertaken on order basis, in these concerns there will not be a need for finished goods. The need for finished goods inventory will be more when production is undertaken in general without waiting for specific orders. Spares: Spares also form a part of inventory. The consumption pattern of raw materials. The stocking policies of spares are different from industry to industry. Some industry like transport will require more spares than the other concerns. The costly spare parts like engines, maintenance spares etc. are not discarded after use, rather they are kept in ready position for furtherer use. All decisions about spares are based on the financial cost of inventory on such spares and the costs that may arise due to their non-availability. Consumables: These are the materials, which are needed to smooth the process of production. These materials do not enter directly into production but they act as catalysts. Consumables may be classified according to their consumption and critically. Generally, consumables stores do not create any supply problem and form a small part of production cost. There can be instances where these materials may account for much value than the materials. The fuel oil may from a substantial part of the cost. Cycle Inventory: The portion of total inventory that varies directly with lot size is called inventory. Determining how frequently to order, and in what quantity, is called lot sizing. Two principles apply. 1. The lot size, Q, varies directly with the elapsed time (or cycle) 2. Between orders. If a lot is ordered every five weeks, the average lot size must equal five weeks demand. 3. The longer the time between orders for a given item, the greater the cycle inventory must be at the beginning of the interval, the cycle inventory is at its KOTTAM KARUNAKARA REDDY INSTITUTE OF TECHNOLOGY

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maximum or Q. At the end of the interval, just before a new lot arrives, cycle inventory drops to its minimum, or 0. The average of these two extremes: Average cycle inventory = Q + o = Q

This formula is exact only when the demand rate is constant and uniform. However, it does provide reasonably good estimate even when demand rates are not constant. Factors other than the demand rate (e.g., scrap losses) also may cause estimating errors when this simple formula is used. Safety Stock Inventory: To avoid customer service problems and the hidden cost of unavailable components, companies hold safety stock. Safety stock inventory protects against uncertainties in demand, lead time, and supply. Safety stocks are desirable when suppliers fail to deliver the desired quantity on the specified date with acceptable quality or when manufactured items have significant amounts of scrap or rework. Safety stock inventory ensures that operations are not disrupted when such problems occur, allowing subsequent operations to continue. To create safety stock, a firm places an order foe delivery earlier than when the item is typically needed. The replenishment order therefore arrives ahead of time, giving a cushion against uncertainty. Purpose and Benefit of Holding Inventory: Although holding inventories involves blocking of a firms fund and the cost of storage and handling every business enterprises has to maintain a certain level of inventories to facilitate uninterrupted production and smooth running of business. In the absence of inventories a firm will have to make purchases as soon as it receives orders. It will mean loss of time and delay in execution of orders which sometimes may cause loss of customers and business. Firms also need to maintain inventories to reduce ordering cost and avail quantity discount, etc. generally speaking there are three main purpose or motives of holding inventories:

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I. The transaction motive which facilitates continuous production and timely execution of sales orders. II. The precautionary Motive which necessitates the holding of inventories for meeting the unpredictable changes in demand and supplies of materials. III. Speculative motive which induces to keep inventories for taking advantages of price fluctuations, saving in re-ordering costs and quantity discounts, etc. RISKS AND COSTS OF HOLDING INVENTORIES: The holding of inventories involves blocking of a firms funds and incurrence of capital and other costs. It also exposes the firm to certain risks. The various costs and risks involved in holding inventories are as below: 1. Capital costs: Maintaining of inventories results in blocking of the firms

financial resources. The firm has, therefore, to arrange for additional funds to meet the cost of inventories. The funds may be arranged from own resources or from outsiders. But in both the arranged from own resources or from outsiders. But in both the cases, the firm incurs a cost. In the former case, there is an opportunity cost of investment while in the later case, the firm has to pay inters tot the outsider. 2. Storage and Handling costs: Holding of inventories also involves costs on storage as well as handling of materials. The storage costs include the rental of the go down, insurance charges, etc. 3. Risk of price decline: There is always a risk of reduction in the prices of inventories by the suppliers in holding inventories. This may be due to increased market supplies, competition or general depression in the market. 4. Risk of Obsolescence: The inventories may become obsolete due to improved technology, changes in requirements, change in customers tastes, etc. 5. Risk Deterioration in Quality: The quality of the materials may also deteriorate while the inventories are kept in stores. Inventory and the Growing Company:

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Inventory Management

Most successful small companies find that as their economic fortunes rise, so too do the complexity of inventory logistics. The increase in inventory management is primarily due to two factors: 1) greater volume and variety of product, and 2) increased allocation of company resources (such as physical space and financial capital) to accommodate that growth in inventory The transaction from seat-of the pants ordering policies and little or no record keeping to a formal inventory system that includes specific ordering policies and a formalized inventory record file is a difficult one for most companies to make, stated Weiss and Gershon. It is but one of the many sources of growing pains that emerging companys experience, especially those in the fast-growing industries, such as fast food or high technology. This transition requires the creation of new job functions to identify the costs (holding, shortage) associated with inventory and to implement the inventory analysis. The inventory record file also must be maintained by someone, and, on a periodic basis, it must be audited by someone. In addition, the transition requires more coordination between different company functions. This transition, they note, often leads into computerization of inventory management. This can be a daunting prospect, particularly for companies lacking employees with appropriate data management backgrounds.

Just In Time Inventory Control System: Just-in-time production is a simple idea that may be difficult to implement, wrote Gershon and Weiss. The basic concept is that finished goods should be produced just in time for delivery, and raw materials should be delivered just in time for production. When this occurs, materials or goods never sit idle, which means that a minimum amount of money is tied up in raw materials, semi finished goods . The just-in-time approach calls for slashing production and purchase lot sizes and also buffer stocks-bit incrementally, a little at a time, month after month, year after year. The result is sustained productivity and quality improvement with greater flexibility and delivery responsiveness. KOTTAM KARUNAKARA REDDY INSTITUTE OF TECHNOLOGY

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Inventory Management

Setting an Inventory Strategy: No single inventory strategy is equally effective for all businesses. Indeed, there are many different factors that can impact the Usefulness of a given inventory strategy, including positioning of inventory, rationalization, segmentation, and continuous improvement efforts. Moreover, small business in particular often faces financial and logistical limitations when erecting their inventory systems. And of course, different industries have different inventory needs. Consumer goods producers, for instance, need to have well-balance inventories at the point of sale, while producers of industrial and commercial products typically do not have clients that require the same degree of delivery lead time. When a company is faced with a need to establish or reevaluate its inventory control systems, business experts often counsel their corporate clients to engage in a practice commonly known as inventory segmenting or inventory partitioning. The practice is in essence a breakdown and review of total inventory by classifications, inventory stages (raw materials, intermediate inventories, and finished products) sales and operations groupings, and excess inventories. Proponents of this method of study say that such segmentation break the companys total inventory into much more manageable parts for analysis.

Key Considerations: According to business experts, perhaps no factor is more important in ensuring successful inventory management than regular analysis of policies, practices, and results. Companies that hope to establish or maintain an effective inventory system should make sure that they do the following on a regular basis: Regularly review product offerings, including the breadth of the product line and the impact that peripheral products have on invent. Ensure that inventory strategies are in place for each product and reviewed on a regular basis. KOTTAM KARUNAKARA REDDY INSTITUTE OF TECHNOLOGY

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Inventory Management

Review transportation alternatives and their impact on inventory / warehouse capacities. Undertake periodic reviews to ensure that inventory is held at the levels that best meets customer needs; this applies to all levels of business, including raw materials, intermediate assembly, and finished products. Regularly canvas key employees for information that can inform future inventory control plans. Determine what level of service (lead time, etc.) is necessary to meet the demands of customers. Establish and regularly review a system for effectively identifying and managing excess or obsolete inventory, and determining why these goods reached such status. Devise a workable system wherein safety inventory stocks can be reached and distributed on a timely basis when the company sees an unexpected rise in product demand. Calculate the impact of seasonal inventory fluctuations and incorporate them into inventory fluctuations and incorporate them into inventory management strategies. Review the companys forecasting mechanisms and the volatility of the marketplace, both of which can (and do) have a big impact on inventory decisions. Institute continuous improvement philosophy in inventory in inventory management. Make inventory management decisions that reflect a recognition that inventory is deeply interrelated with many other areas of business operation. To summarize, inventory management system should be regularly reviewed from top to bottom as an essential part of the annual strategic and business and business planning processes. Indeed, even cursory examinations of inventory statistics can sometimes provide business owners with valuable insights into the companys foundations. business consultants and managers alike note that if an individual KOTTAM KARUNAKARA REDDY INSTITUTE OF TECHNOLOGY

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Inventory Management

business has an inventory turnover ratio that is low in relation to the average for the industry in which it operates, or if it is low in comparison with the average ratio for the business, it is pretty likely that the business is carrying a surplus of obsolete or otherwise unsalable stock inventory. Conversely, they note that if a business is experiencing unusually high inventory turnover when compared with industry or business averages, then the company may be losing out on sales because of a lack of adequate stock on hand. it will be helpful to determine the turnover rate of each stock item so that you can evaluate how will each is moving, noted the entrepreneur magazine small business advisor. You may even want to base your inventory turnover on more frequent periods than a year. For perishable items, calculating turnover periods based on daily weekly or monthly periods may be necessary to ensure the freshness of the product. This is especially important for food-service operations. INVENTORY ACCOUNTING: The way in which a company accounts for its inventory can have a dramatic affect on its financial statements. Inventory is a current asset on the balance sheet. Therefore, the valuation of inventory directly affects the inventory, total current asset, and total asset balances. Companies intend to sell their inventory, and when they do, it increases the cost of goods sold, which is often a significant expense on the income statement. Therefore, how a company values its inventory will determine the cost of goods sold amount, which in turn affects gross profit (margin), net income before taxes, taxes owned, and ultimately net income. It is clear, then, that a companys inventory valuation approach can cause a ripple effect throughout its financial picture. One may think that inventory valuation is relatively simple. For a retailer, inventory should be valued for what it cost to acquire that inventory. When an inventory item is sold, the inventory account should be reduced (credited) and cost of goods sold should be increased (debited) for each inventory item. This works if a company is operating under the specific identification method. That is, a company knows the cost of every individual item that is sold. This method works well when the KOTTAM KARUNAKARA REDDY INSTITUTE OF TECHNOLOGY

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Inventory Management

amount of inventory a company has is limited and each inventory item is unique. Examples would car dealerships, jewelers, and art galleries. The specific identification method, however, is cumbersome in situations where a company owns a great deal of inventory and each specific inventory item is relatively indistinguishable from each other. As a result, other inventory valuation methods have been developed. The best known of these are the FIFO (first-in, first out) and LIFO (last-in, first-out) methods. First in, first out (FIFO): Method of accounting for inventory whereby, quite literally, the inventory is assumed to be sold in the chronological order in which it was purchased. For example, the following formula is used in computing the cost of goods sold. Under the FIFO method, inventory costs flow from the oldest purchases forward, with beginning inventory as the starting point and ending inventory representing the most recent purchases. The FIFO method contrasts with the LIFO or last in, first out method, which is FIFO in reverse. The significance of the difference becomes apparent when inflation or deflation affects inventory prices. In an inflationary period, the FIFO method produces a higher ending inventory, a lower cost of goods sold figure, and a higher gross profit. LIFO, on the other hand, produces a lower ending inventory, a higher cost of goods sold figure, and a lower reported profit. In accounting for the purchase and sale of securities for tax purposes, FIFO is assumed by the IRS unless it is advised of the use of an alternative method. First in, first out (FIFO): Method of inventory valuation that assumes merchandise is sold in the order of its receipt. The first-price in is the first-price out. Hence cost of sales is based on

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Inventory Management

older dollars. Ending inventory is reflected at the most recent prices. Assume the following data regarding inventory during the year (LIFO) last-in, first-out: On the other hand, is an accounting approach that assumes that the most recently acquired items are the first one sold? Therefore, the inventory that remains is always the oldest inventory. During economic periods in which prices are rising, this inventory accounting method yields a lower ending inventory, a higher cost of goods sold, a lower gross profit, and a lower taxable income. The LIFO Method is preferred by many companies because it has the effect of reducing a companys taxes, thus increasing cash flow. However, these attributes of LIFO are only present in an inflationary environment. The other major advantage of LIFO is that it can have an income smoothing effect. Again, assuming inflation and a company that is doing well, one would expect inventory levels to expand. Therefore, a company is purchasing inventory, but under LIFO, the majority of the cost of these purchases will be on the income statement as part of cost of goods sold. Thus, the most recent and most expensive purchases will increase cost of goods sold, thus lowering net income before taxes, and hence net income. Net income is still high, but it does not reach the levels that it would if the company used the FIFO method. Given the importance differences that exist between the various inventory accounting methodologies, it is imperative that the inventory footnote be read carefully in financial statements, for this part of the document will inform the reader of the method of inventory valuation chosen by a company. Assuming inflation, FIFO will result in higher net income during growth periods and a higher and more realistic inventory balance. In periods of growth, LIFO will result in lower net income and lower income tax payments, thus enhancing a companys cash flow. During periods of

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Inventory Management

contraction, LIFO will result in higher income levels, but will also undervalue inventory over time.

Small business owners weighing a switch to a LIFO inventory valuation method should note that while making the change is a relatively simple process (the company files IRS Form 970 with its tax return), switching away from LIFO is not so easy. Once a company adopts the LIFO method, it can not switch to FIFO without securing IRS approval. Donating Excess Inventory: In recent years, many small (and large) business have gained valuable tax deductions by donating obsolete or excess inventory to charitable organizations, churches, and disaster relief efforts. The type of deduction that can be claimed depends on the business structure of the donating company. If youre organized as an S corporation (S Corporation with a limited number of stockholders (35 or fewer) that elects not to be taxed as a regular (C) corporation and meets certain other requirements Shareholders include in their personal tax returns their pro Rata share of capital gains, ordinary income, tax preference items, and so on. This form avoids corporate Double Taxation while providing limited liability protection to shareholders of a corporation.) OBJECTIVES OF INVENTORY MANAGEMENT: The main objective so inventory management are operation and financial. The operational objective mean that the material and spares should be available in sufficient quantity so that work is not disrupted for want of inventory. The financial objective means that investments in inventories should not remain idle and minimum working capital should be locked in it. The objectives of inventory management are as follows: KOTTAM KARUNAKARA REDDY INSTITUTE OF TECHNOLOGY

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To ensure continuous supply of materials, spares and finished goods so that production should not suffer at any time and the customers demand should also be met. To avoid both over-stocking and under-stocking of inventory. To maintain investment in inventories at the optimum level as required by the operational and sales activities. To keep material cost under control so that they contribute in reducing cost of production and overall cost. To eliminate duplication in ordering or replenishing stocks. This is possible with the help of centralizing purchases. To minimize losses through deterioration, pilferage, wastages and damages. To design proper organization for inventory management. Clear cut accountability should be fixed at various levels of the organization. To ensure perpetual inventory control so that materials shown in stock ledgers should be fixed actually lying in the stores. To ensure right quality goods at reasonable prices. Suitable quality standard will ensure proper quality of stocks. The price analysis, the cost analysis and value analysis will ensure payment of proper prices. To facilitate furnishing of data for short term and long term planning and control of inventory. Material Control: Most of the manufacturing concerns. The cost of raw materials represents a major part of the total cost of production. Hence proper control over material is necessary from the time the order is place with the supplier till they are actually consumed. An efficient system of material control will lead to significant reduction in production cost. Material control may be defined as the Systematic control over the procurement, storage and usage of materials so as to maintain an even flow of KOTTAM KARUNAKARA REDDY INSTITUTE OF TECHNOLOGY

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Inventory Management

materials and avoiding at the same time excessive investment in inventories. Material control covers three stages namely.

Purchases of material Storing of material Issue of material Objectives: The objectives of material controls as follows: 1) To ensure regular and uninterrupted supply of materials i.e., to make materials available as and when they are needed. 2) To keep investment in stock at a reasonable levels, so that there is no loss of interest on capital. 3) To purchase the materials at a reasonable price without sacrificing the quality of such materials. 4) To avoid abnormal wastage by exercising direct control. 5) To avoid the risk of spoilage and obsolescence of the materials by fixing the maximum stock level. Issue of Material Management: As per major activity groups involved in material management in any manufacturing organization. Issue related to materials planning. Issues related to purchase Issues related to stores or inventory. Issue related to material handling & display.

Issue Related to Material Planning: KOTTAM KARUNAKARA REDDY INSTITUTE OF TECHNOLOGY

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Material Identification Standardization Make or Buy Coding & Classification Quality specification By providing samples or prototype. By providing manufacturing operation specification. By brand or trade name. By specifying well accepted market grades. By specifying testing producers relevant standards. By specifying/ providing engineering drawing/blue prints.

Determination of Stock Levels: Carrying of too 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 is too high it will be unnecessary tie-up of capital. Therefore, an optimum level of inventory where cost is the minimum and at the same time their Id. No. stock-out, which may result is loss of sale or stoppage of production. Various stock levels are discussed as such. Minimum Level: This presents the quantity, which must be maintained in hands at all times. If stock is less than the minimum level then the work will stop due to shortages of materials. Lead time:

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Inventory Management

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 in processing the order and then executing it is known as lead-time. It is essential some inventory during this period.

Rate of consumption: It is the average consumption of materials in the factory. The rate of consumption will be decided on the basis of past experience and production. Nature of material: The nature of materials also affects the minimum level. If material is required only against special orders of the consumers then minimum stock will not be required for such materials minimum stock level can be calculated using the formula: Minimum stock level = Re-order level (normal consumption* normal reorder period). Re-order level: When the quantity of materials reaches at a certain figures then fresh order is sent to get materials again. The order is sent before the materials reach minimum stock level. Re-ordering level or ordering level is fixed between minimum stock level and maximum stock level. The rate of consumption, number of days required on any day is taken into account while fixing reordering level. Re-ordering level is fixed with the following formula; Re- order level = maximum consumption * maximum re-order period Maximum level: It is the quantity of materials beyond which a firm should not exceed its stock. 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. Over stocking will more blocking of more working capital, more space for storing the KOTTAM KARUNAKARA REDDY INSTITUTE OF TECHNOLOGY

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Inventory Management

materials, more wastage of materials and more chances of losses from obsolescence. Maximum stock level will depend upon following factors: The maximum requirement of materials at any point of time. The availability of space for storing the materials. The rate of consumption of materials during lead-time. The cost of maintaining the stores. The possibility of fluctuation in prices. Availability of materials. If the materials are available only during seasons then they have to store for the rest of the period. The possibility of change in fashion and production process will also affect the maximum stock level. The following formula may be used for calculating maximum stock level: Maximum stock level = re-order level + re-ordering quantity (minimum consumption * minimum re-ordering period). Danger level: It is the level beyond which material should not fall in any case. If level arises then immediately steps should be taken to replenish the stock even if more cost is incurred in arranging the materials. If materials. If material is not arranged immediately then there is a possibility of stoppage of work. Danger level is determined with the formula: Danger level = consumption * maximum re- order period for emergency purchases. Average stock level: The average stock level is calculated as such: Average stock = minimum stock level + of re-order quantity. Determination of safety stock KOTTAM KARUNAKARA REDDY INSTITUTE OF TECHNOLOGY

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Inventory Management

The safety stock is a buffer to meet unanticipated increase in usage. The usage of inventory cannot be perfectly forecasted. Ft fluctuates over a period of time. The demand for materials may fluctuate and delivery of inventory may also be delayed and in such a situation the firm can face a problem of stock-out. The stock-out can prove costly by affecting the smooth working of the concern. In order to protect against out of usage fluctuations, firms usually some margin of safety stocks. The basic problem is to determine the level of safety stocks. Two costs are involved in determination of this stock. I.e. opportunity cost of stock outs and the carrying costs. The stock-outs of raw material cause production as the firm cannot provide stock-outs will occur resulting into the large opportunity costs. On the other hand, the larger quantity of safety stocks involves higher carrying costs. Ordering system of inventory: The basic problem of inventory is ton decide the re-order point. The point indicates when an order should be placed. The re-order point is determined with the help of these things A.) Average consumption rate. B.) Duration of lead time. Economic order quantity, when the inventory is depicted to lead time consumption, the order should be placed. There are three prevalent system of ordering and a concern may use any one of these; Fixed order quantity system generally known as economic order quantity (EOQ) systems. Fixed period order system of periodic re-ordering system or periodic review system; Single order and schedule part delivery system. Economic order quantity (EOQ): The quantity of material to be ordered at one time is known as economic ordering quantity. This quantity is fixed in such a manner as to minimize the cost of KOTTAM KARUNAKARA REDDY INSTITUTE OF TECHNOLOGY

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Inventory Management

ordering and carrying the stock. Carrying cost is the cost of holding the materials. The quantity to be ordered should be such which minimizes the carrying and ordering costs. The order for the material to be purchased should be large to earn more trade discount and to take advantage of bulk transport, but at the same time it should not be tool large to incur too heavy a payment on account of interest, storage and insurance cost. If the price to be paid is stable, quantity to be ordered each time can be ascertained by following formula:

Q = 2CO\I. Where: q = quantity to be ordered. C = consumption of the material concerned in units during a year O = cost of placing and order including the cost of receving the goods i.e. cost of getting an item into the firms inventory. I = interest payment including variable cost of storing per unit per year i.e., holding costs of inventory. Economic order quantity is determined keeping in view the ordering costs and carrying costs. With the interaction of these two costs, the economic ordering costs During a particular period are equal to carrying costs during that period and total cost to order and carry is lowest. There are many variations on the basic EOQ model. I have listed most useful once below,

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Inventory Management

Quantity discount logic can programmed to work in conjunction with the EOQ formula to determined optimum order quantity. Most systems will require this additional programming. Additional logic can be programmed to determine max quantities for subject to spoilage or to prevent obsolescence on items reaching end of their product life cycle. When use in manufacturing to determine lost size where production runs are very long and finished product is being released to stock and consumed /sold through out the production run you may need to take into account the ratio of production consumption to more accurately represent the average inventory level.

Assumptions: There are a number of assumptions that must be made with the EOQ. These include: Only one product is involved Deterministic demand(demand is known with certainty) Constant demand (demand is stable throughout the year) No quantity discounts. Constant costs (no price increase or inflating) While these assumptions would seem to make EOQ irrelevant for use in a realistic situation, it is relevant for items that have independent demand .this means that the demand for the items is not derived from the demand for something else. For example, the demand for steering wheels would be derived from the demand for automobiles but the demand for purses is not derived from anything else; purses have independent demand.

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Inventory Management

Inventory Turnover Ratio: Every firm has to maintain a certain level of inventory of finished goods so as to be able to meet the requirements of the business. But the level of inventory should neither be too high nor too low. It is harmful to hold more inventories for the following reasons. It unnecessarily blocks capital which can otherwise be profitably used somewhere else. Over-stocking will require more go down space, so more rent will be paid. There are chances of obsolescence of stocks. Consumers will prefer goods of latest design, etc. Slow disposal of stacks will mean slow recovery of cash also which will adversely affect liquidity. There are chances of deterioration in quality if the stocks are held for more periods. It wills there fore, be advisable to dispose off inventory as early as possible. On the other hand, too low inventory may mean loss of business. Inventory turnover ratio also known as stock velocity is normally calculated as sales/ average inventory or cost of goods sold/ average inventory. It would indicate whether inventory has been efficiently used or not. The purpose is to see whether only the required minimum funds have been locked up in inventory. Inventory turnover ratio indicates the number of times the stock has been turned over during the period and evaluates the efficiency with which a firm is able mange its inventory Inventory turnover ratio is calculated to indicate whether inventories have required minimum funds in inventory. The inventory turnover ratio also known as stock velocity is normally calculated as sales/average inventory or cost goods sold/ average inventory cost. Inventory conversion period may also be calculated to find the average time taken for clearing the stock. Inventory turnover ratio = cost of goods sold/ average inventory at cost Inventory turnover ratio = net sales / average inventory Inventory conversion period = days in year / inventory turnover ratio KOTTAM KARUNAKARA REDDY INSTITUTE OF TECHNOLOGY

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Inventory Management

Generally, the cost of goods sold may not be known from the published financial statements. In such circumstances, the inventory turnover ratio may be calculated by dividing net sales by average inventory at cost. If average inventory at cost is not known then inventory at selling price may be taken as denominator and where the opening inventory is not known the closing inventory figure may be taken as the average inventory. Inventory turnover ratio = net sales / average inventory at cost Inventory Turnover ratio = Net sales/ Average inventory at selling cost Inventory Turnover ratio = Net sales / Inventory Inventory Conversion Period: It may also be of interest to see average time taken for clearing the stocks. This can be possible by calculating inventory conversion period. This period is calculated by dividing the number of days by inventory turnover. Inventory Reports: From effective inventory control, the management should be kept informed with the latest stock position of different items. This usually done by information necessary for managerial action. On the basis of these reports management takes corrective action wherever necessary. Valuation of Inventory: The value of materials has a direct bearing on the income of a concern, so it is necessary that a method of pricing of materials should be such that it gives a realistic value of stock the traditional method of valuing materials cost price or market price which ever is less is no longer the only method. If management is interested to show more profits then it can choose such methods which will more stock of vice versa. To safe guard public interest the government of India has instituted statutory controls to prevent frequent change of material valuation methods. A concern will have to use a KOTTAM KARUNAKARA REDDY INSTITUTE OF TECHNOLOGY

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Inventory Management

particular valuation method for least three years and any changes there from must be approved by the board. The following methods of pricing material issues or generally used: First in First out method (FIFO method) Last in First out method(LIFO method) Average price method Weighted Average price method Simple Average price method Base stock method Standard price method Average Cost Method: In average cost method of pricing all materials in stock or so mixed that a price based on all costs are formed. Average cost may be of two types. Simple Average Method: In this method the prices of all lots in stock are averaged and the materials are issued on that average price. Though this is simple method of pricing materials but particularly this method does not give good results. The total cost of materials is not observed in this method. Weighted Average Method: In this method that the total cost of all materials is divided by the total number of items in stock. The price calculated in this way has not been for issue of materials up to the time a fresh purchase has not been made. After a fresh purchase, the quantity will be added to earlier balance quantity and material cost will be changed total cost. A fresh price is calculated by dividing the changed total cost by the number of units in stock after the purchase. A new price list calculated where even a fresh purchase is made. KOTTAM KARUNAKARA REDDY INSTITUTE OF TECHNOLOGY

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Base Stock Method: In this method some quantity of materials is assumed to be necessary for keeping the concern going. The quantity is not issued unless otherwise there is an emergency. This material which is not issued as is kept in stock is known as base stock. Standard Price Method: The issue price of the materials is pre determined or estimated in this method. The standard price is based on market conditions, usage rare, handling facilities, storage facilities, etc. The materials are priced at standard price irrespective of price for various purchases.

Market Price Method: In this method the prices charged to production are not costs incurred on the materials but latest market prices. The market prices may either be replacement prices or realizable prices. The replacement prices are used for the materials which are kept in stock for use in production and realizable prices are used for the goods kept for resale. The prices of issue for materials are always the replacement prices. SYSTEM OVERVIEW Before analysis is attempted, it is proposed to present material accounting practices along with documentation at Phillips india (p) ltd. overseas. The main objective of inventory accounting and valuation of inventories are: Accurate and regular recording of all transactions in the books. Proper valuation of material receipts, issues, return and balances. System Overview:

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Inventory Management

The following system is being followed in Phillips india (p) ltd. overseas, and the main features of the system are as follows: 1. Receipt vouchers are prepared on receipt of materials. 2. Issues voucher are prepared for all issues of out of stores. 3. All receipts, issues and returns are recorded in priced stores ledger (PSL). 4. Stock transfer voucher (STV) is used for recording transferring 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 production in shop floor to finished stores. 6. Physical verification is carried out at regular interval and discrepancies and reconciles and recorded. 7. Finished goods, work in progress valuation is as per the accounting policy of company. Materials Documentation and Cost Controls: The materials accounting and cost accounting system have been designed the frame work of accounts codes and accounting policies which would facilitate identifying direct elements of cost, such as direct material, direct labour and directly allocable expenses (such as expenses of sub contracting) which are booked manually to the direct material. The following documentation and system is being followed in Phillips india (p) ltd. overseas: Receipt documents: Certified Stores Receipt Voucher (CSRV) : This is issued by stores personnel to bills section to F&A wing in order to classify the material into raw material stores and spares, consumable tools, packing materials, sub contractors services, and other operational expenses. Based on the purchase order, the bill section does the provisional valuation by using fixed percentage for freight, insurance, and other

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Inventory Management

incidental and regard to customs duty the percentages as per tariff is adopted and purposed the following entry: Stock A/c Dr

To Sundry Creditors A/c Material code, quantity etc which is fed to EDP which calculates the value based on monthly weight average method. Based on MIR data the WIP is brought out by collating material analysis. The direct material is booked job wise in WIP ledger and the same is reconciled with financial records. Thus, the direct materials job wise may be traced from WIP ledger. In the similar fashion, some other receipt document and issue document are operated like; 1. Cash purchases receipt voucher for cash purchases. 2. Finished goods issue note for the finished products 3. Stock transfer voucher for any stock transfer transactions. 4. Material return note for any materials being returned. Based on the above documentations EDP generates the following prints outs for material viz. Priced stores ledger is brought out on monthly basis consisting of that months receipts, issues, balance stock available with value and with summary and cumulative receipts, issues and consumption values for materials like raw materials, stores and spares, consumable tools and packing materials. Inventory is brought on monthly basis comprising of materials codes in seriatim along with material description unit code. Quantity available as at the end of the month rate of the material and total value and also indicating cumulative receipts and cumulative consumption.

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Inventory Management

Job wise material analysis is brought out on monthly basis for those jobs, for which materials have been consumed along with value and description of the material in order to have monthly record of material used for each job. Inventory Control and its Impact on Cost: Value wise inventory and consumption analysis are brought out on quarterly basis indicating RM; SS, CT, PM are valued at cost. A class items which are 70%, B class items which are valuing 20%, C class items are verified by the stores and to the extent certificate are issued at the year end regarding the correctness. Physical balance is verified with kardex and the difference is intimated to stores. FAW(Farm workers) of the group verifies and gives the rectification entries i.e., shortage items value are charges off to physical inventory variation and the excess quantities are adjusted in the inventory ledger after obtaining the component authoritys approval. The system enables to control the inventories and at the same time costs on some are controlled.

ABC analysis:
The material is divided into a number of categories for adopting a selective approach for material control. It is generally seen that in manufacturing concern, a small percentage of items contribute a large percentage of value of consumption and a large percentage of items of materials contribute a small percentage of value. In between these two limits there are some items which have almost equal percentage of value of material. Under ABC analysis, all the materials are divided in to three categories viz. A, B&C. past experience has shown that almost 10% of items contribute to 70% of value of consumption and this category is called category A. about 20% of the items contribute about 20% of value of consumption and this is known as category B. category C covers about 70% of items of material which contribute only 10% of value of consumption. There may be some variation in different organizations and an adjustment can be made in these percentages.

MAKING OF ABC ANALYSIS:

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The entire procedure for making ABC analysis can be summarized in the following steps: Determine the number of units sold or used in the past 12-months period. Determine the unit-cot standard for each item. Compute the annual consumption value (in rupees) of each consumed item by multiplying annual consumption (of units) with the unit price. Arrange these items in descending order of the usage value compute above.

ABC Classification of Items: Graphical presentation:

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CLASS NO.OF.ITEMS

PERCENTAGE OF ITEMS

CONSUMPTION VALUE

VALUE PERCENTAGE

27

2,014,576.67

91%

27

1,55,753.16

6%

27

17,636.22

3%

INTERPRETATION:
The value of percentage for Class-A products is very high when compare to Class-B and Class-C products.

Inventory, Materials, Sales and Production at a Glance.

KOTTAM KARUNAKARA REDDY INSTITUTE OF TECHNOLOGY

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Inventory Management

2005-2006 2006-2007 Particulars Raw materials 5630 5267

2007-2008

2008-2009 2009-2010

1645

1616

1616

Work progress

3877

4260

3372

3799

3233

Finished goods

651

1183

946

649

634

Total

10158

10710

6622

6064

5247

Sundry debtors

31344

42946

58073

79469

98870

Materials consumed Net sales

49307

47247

72229

38917

47446

89218

84177

72230

65188

91790

Gross sales

100056

93455

77067

70029

100590

Cost of Production(-) profit Total

89218 8058 81160

86935 13055 73880

72781 5071 67710

68046 5204 61842

76112 19214 56897

RAW MATERIAL

KOTTAM KARUNAKARA REDDY INSTITUTE OF TECHNOLOGY

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Inventory Management

Particulars

2005-2006

2006-2007 2007-2008

2008-2009 2009-2010

Raw material

5630

5267

2304

1616

1878

Material Consumed(per Month) Monthly Consumption(2) No. of months Raw material Stock available w.r.t. monthly consumption(3) =R.M/monthly Consumption(1/2)

49307/12

47247/12

41979/12

38917/12

47447/12

4108

3937

3939

3243

3954

1.37

1.34

0.66

0.50

0.47

INTERPRETATION
The corporation held a maximum stock of Raw material in the year 2005-2006 and the stock of raw material fluctuated from 2005-2006 to 2009-2010.

WORK IN PROGRESS:
KOTTAM KARUNAKARA REDDY INSTITUTE OF TECHNOLOGY

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Inventory Management

Particulars Work in progress Cost of production (per month) Monthly consumption(2) No .of months work in progress held in Inventory=W.I. P/M Monthly Consumption

2005-2006 2006-2007 3877 81160/12 6763 0.57 4260 73880/12 6157 0.69

2007-2008 3372 67710/12 5643 0.60

2008-2009 2009-2010 3799 62842/12 5237 0.73 3233 56897/12 4741 0.68

Graph presentation for work in progress:

work in progress 0.8 0.7 Work in Progress 0.6 0.5 0.4 0.3 0.2 0.1 0 2005-06 2006-07 2007-08 years 2008-09 2009-10 work in progress 0.57 0.73 0.6

0.69

0.68

INTERPRETATION:
The corporation held a peak Work in progress during the year 2008-2009 and the year 2009-10, there is slight fluctuations in work in progress.

KOTTAM KARUNAKARA REDDY INSTITUTE OF TECHNOLOGY

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Inventory Management

FINISHED GOODS:
Particulars Finished goods Net sales Monthly Consumption No. of Months F.G Held in inventory 2005-2006 651 89218/12 7435 2006-2007 1183 84177/12 7015 2007-2008 946 72231/12 6019 2008-2009 945 65787/12 5482 2009- 2010 649 91791/12 7649

0.09

0.17

0.16

0.17

0.08

INTERPRETATION:
The corporation held peak finished goods stock during the year 2005-2006 to 2008-2009 and the finished goods stock is decreased from 2009-10.

KOTTAM KARUNAKARA REDDY INSTITUTE OF TECHNOLOGY

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Inventory Management

SUNDRY DEBTORS:
Particulars 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010

Sundry debtors Gross sales Monthly consumption No of month Of sales

31344 10056/12 8338 3.76

42946 93455/12 7788 5.51

36774 77067/12 6422 5.73

74468 70029/12 5836 12.76

98871 10059/12 8383 11.79

INTERPRETATION:
The sundry debtors of the corporation are at peak level during year 2008-2009. And this number is fluctuated from 2005-2006 to 2009-2010.

KOTTAM KARUNAKARA REDDY INSTITUTE OF TECHNOLOGY

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Inventory Management

CALCULATION OF INVENTORY TURNOVER RATIO:


Inventory turnover ratio=Cost of goods sold/average inventory Cost of goods sold=sales/gross profit. Average inventory = (Opening stock+ closing stock)/2. Particulars 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010

Sales(A)

100055.98

93455.40

77066.76

70029.03

100590

Gross profit(B)

82683.22

78965.66

70139.75

6222.80

20702

Cost of Goods sold(C)(A-B=C) Inventory opening stock(D) Closing stock(E)

82683.22

78965.66

70139.75

63806.23

79888

14531.93

10158.94

10710.86

6622.64

7681

10158.94

10710.86

6622.64

7681.96

6855

Average inventory(F) (D+E/2=F) Inventory turnover ratio(C/F)

12345.44

10434.9

8666.75

7152.30

7268

6.7

7.57

8.09

8.92

10.99

KOTTAM KARUNAKARA REDDY INSTITUTE OF TECHNOLOGY

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Inventory Management

INVENTORY TURNOVER RATIO:

INVENTORY TURNOVER RATIO


12 INVENTORY TURNOVER RATIO 10 8 6.7 6 4 2 0 2005-2006 2006-2007 2007-2008 YEARS 2008-2009 2009-2010 7.57 8.09 8.92 10.99

INTERPRETATION:
From the above calculation it is found that the inventory turnover has gradually increased from 6.7 to 10.99 from the year 2005-06 to 2009-2010 which is indicative of good inventory management.

KOTTAM KARUNAKARA REDDY INSTITUTE OF TECHNOLOGY

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Inventory Management

Inventory conversion period


Years Days in year/ Inventory turnover ratio 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010 365/6.70 365/7.57 365/8.09 365/8.92 365/10.99 24.45 27.63 29.52 32.55 33.21 No of days

Inventory Conversion Period


35 Inventory Conversion Period 30 25 20 15 10 5 0 2005-2006 2006-2007 2007-2008 Ye ars 2008-2009 2009-2010 24.45 27.63 32.55 29.52 33.21

INTERPRETATION:
From the above calculation the inventory conversion period has gradually increased from 2005-2006 to 2009-2010. KOTTAM KARUNAKARA REDDY INSTITUTE OF TECHNOLOGY

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Inventory Management

FINDINGS
The corporation has maintained maximum stock of raw material during the year 2005-2006. The corporation held peak work in progress during the year 2008-2009 and there are fluctuations in work in progress between 2006-07 to 2007-2008. The corporation has maintained maximum finished goods stock during the year 2006-2007 and it is decreased from 2007-2008 to 2009-2010. The sundry debtors of the corporation are at peak level during year 2008-2009. And this number is fluctuated from 2005-2006 to 2009-2010. The inventory turnover ratio of the corporation has gradually increased from the year 2005-2006 to 2009-2010. The inventory conversion period of the corporation has also gradually increased from 2005-2006 to 2009-2010.

KOTTAM KARUNAKARA REDDY INSTITUTE OF TECHNOLOGY

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Inventory Management

SUGGESTIONS
A-category of products must be taken care of properly as it forms a major part and appropriate method of valuing the product must be used. The credit policy of the corporation is one month credit. However the study revealed that the organization has never maintained one month credit during the study of the project so my request is to check on credit period Keep check on creditors as it effects the working capital, which may even leads to losses Organization has to pay attention on the amount of % of raw material on cost of production, which is high when compared to earlier and slightly low when compared to ideal percentage. Suggestion must be taken form all department of the organization for proper different department in the organization Under-stocking will results in stoppage of work the investment in inventory management should be kept in reasonable limits.

KOTTAM KARUNAKARA REDDY INSTITUTE OF TECHNOLOGY

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Inventory Management

CONCLUSIONS
As PHILLIPS INDIA (P) LTD. is a multi product organization catering to different customers on divergent technologies the inventory procurement for various ranges of product is quite high. Inventory procurement is also based on and does not conform to economic batch quantities leading to surplus inventories and non moving inventories. A preventive measure there should be a regular monitoring mechanism at the stage of procurement, whether there is a control exercised in purchasing materials in line with estimates, to have a better control on the inventory levels. A regular reporting system on inventory should be placed to highlight on carrying cost and opportunity cost. Organization needs to upgrade of the technology, which in turn increases effective utilization of material. There is a regular physical verification for A and B class items by internal audit department to highlight on non-moving inventories.

KOTTAM KARUNAKARA REDDY INSTITUTE OF TECHNOLOGY

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Inventory Management

BIBILIOGRAPHY

S.N.CHARY (2001), PRODUCTION AND OPERATION MANAGEMENT CHUNAWALLA PATEL (2004), PRODUCTION AND OPERATION MANAGEMENT I.M.PANDEY (1999), FINANCIAL MANAGEMENT Website Referenced http://www.india.Phillips.com http://www.google.com

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