A Project Report on INVENTORY MANAGEMENT AT KAKATIYA OVERSEAS PVT LTD A Project report submitted to osmania university HYDERABAD In partial fulfillment for the award of the degree of MASTER OF BUSINESS ADMINISTRATION By N.S AMBASA (10908123) Under the esteemed guidance of (KEERTHI) SRI INDU P.G COLLEGE (Affiliated to osmania University)
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A Project Report on
INVENTORY MANAGEMENT
AT
KAKATIYA OVERSEAS PVT LTD
A Project report submitted to osmania university
HYDERABAD
In partial fulfillment for the award of the degree of
MASTER OF BUSINESS ADMINISTRATION
By
N.S AMBASA
(10908123)
Under the esteemed guidance of
(KEERTHI)
SRI INDU P.G COLLEGE
(Affiliated to osmania University)
Hyderabad
ACKNOWLEDGEMENT
I express my sincere gratitude to (G.Rama Rao) (Director) for allowing to carry out this project in KAKATIYA OVERSEAS PVT LTD.
I am also thankful to the employees of KAKTIYA OVERSEAS PVT.LTD, for their kind cooperation in completion of my project.
I express my sincere thanks to L.Swetha Reddy(Export Executive) for her guidance in completion of my project.
I extend my heart-felt gratitude to Keerthi, sri indu pg college for
her valuable guidance in my project and the preparation of report and
making this work successful
I would like to thanks Mr SUNDARAM, Head of Department, SRI INDU P.G COLLEGE for his valuable support.
DECLARATION
I here by declare that this Project Report titled “INVENTORY MANAGEMENT” At “KAKATIAYA OVERSEAS” submitted by me to the Department of Master of Business Administration is a bonafide work done by me and it is not submitted to any University or institution for the award of any Degree or Diploma or published any time before.
This is to certify that the Project Report title Inventory
Management submitted in partial fulfilment for the award of
MBA Programme of Department of Business Management,
OU HYD, was carried out by Ms KEERTHI under my
guidance. This has not been submitted to any other
University or Institution for the award of any
degree/diploma/certificate.
Name and address of the Guide Signature of the Guide
CHAPTERISATION:
Chapter 1: Industry profile
1.1 Introduction of industry profile
Chapter 2: Company and product profile
2.1 Introduction of company
Chapter 3: Project details
3.1 Introduction
3.2 Need for study
3.3 Benefits of study
3.4 Methodology & Data base
3.5 Objectives
Chapter4: Introduction to inventory management
4.1 Introduction
4.2 Inventory control & its impact on cost
4.3 Inventory corporate finance
4.4 Risks & costs of holding inventory
4.5 Inventory Accounting
4.6 Objectives of inventory management
4.7 Tools & techniques
4.8 System & overview
Chapter 5: Analysis and interpretation
5.0 Making ABC analysis
5.1 calculation of inventory
Chapter 6: Suggestions & conclusion
6.1 Findings & suggestion
6.2 Conclusion
6.3 bibliography
INDIAN STONE INDUSTRY PROFILE
INTRODUCTION
India has major resources of marble, granite, sandstone, Kotahstone, quartzite & slate. Granite resources are largely in South India and Marble deposits are largely in Western India (Rajasthan & Gujarat).
A variety of stone products like all types of marble, tile, granite etc are available in the market. The beauty and opulence of natural stone products have prevailed as the most sought after finish in any building in crafting customized floors, walls, countertops, columns, fireplaces and bathroom.
These stone products are available in polished as well as unpolished state. These stone products come with various price ranges suiting every individual's budget. They are available in different size, shape, type, thickness etc. Some of these stone products are available in block, some in slabs and some in tile. They are imported sometimes and sometimes locally made. Stone products are strong and sturdy and can carry a lot of weight.
Natural stone products are mostly used in making and decorating building, office, industry, organizations etc. These are also custom made as per the requirement and specifications of the customer. They are used in construction industries and in most of the industrial sectors.
The range of natural stones includes slate stone, sand stone, mosaic stone, cobble & pebble, marble, granite, minerals and genuine, natural stones that
are not dyed, synthesized, stabilized or enhanced - just genuine cut and polished gemstones, or pure rough gem material for your use.
Granite tile and marble flooring are excellent floor materials. Both marble and granite tile are natural stone products, very durable and stain resistant. Other options for floors include slate and terrazzo. All except for terrazzo are installed like ceramic tile. Marble and granite tile exhibit a wide range of stain resistance. Marble is more porous than granite.
Natural beauty, durability, resistance to heat and a sense of permanence are the hallmarks of a granite tile. Granite is an important structural and ornamental stone, and due to its high compressive strength and durability, it is used for massive structural work. Fine-grained granite is employed for ornamental and monumental work as well as for inscription purposes. It is the hardest of structural natural stones. Granite tiles are quite literally, as old as the earth, perfect for use in residential and commercial flooring applications. Granite slabs are ideal for fabricating granite counter tops, flooring, retaining walls and landscaping around a center fountain/pond.
A marble is a metamorphic rock formed by alteration of limestone or dolomite, often irregularly colored by impurities and used especially in architecture and sculpture. Marble tiles are suitable for bathrooms, entryways and fireplaces, living & dining areas. Marble floor tiles are also used for both interior and exterior flooring applications. Some of the different colors of marble are white, red, black, mottled and banded, gray, pink, and green. Marble flooring adds class to the home and gives it a feel of luxury. The best thing about the marble floors is that, they lend a very soothing cooling touch to the home.
The highest producer of stones
- Highest producer of dimensional stones in the world accounting for over 27% of the world stone production.
- 16.16 million tons of stone production in the year 1997-98 out of a total world production of 61 million tons.
- Over 2 million people are employed in stone sector.
Indian Stone Production (In Thousand tons)
1991-92 1992-93
1993-94
1994-95
1995-96
1996-97 1997-98
Marble 1966 2244 2086 2627 3186 3712 3622
Granite 989 3073 3618 4460 4555 4550 4950
Sandstone 4411 4435 3978 3304 4562 5501 5461
Flaggy Limestone
620 996 823 1407 1760 1710 2118
Slate 3 5 4 9 7 11 8
Total 7989 10753 10509 11807 14070 15484 16159
(Source: State Department of Mines & Geology and All India Granites & Stones Association)
Marching towards global leadership
- Export of Stones - US $ 301 million (Rs.13,000 million) in 1997--98 - India ranks 3rd in world stone exports with a 10.8% share in 1997 (in
terms of tonnage). - India ranks 1st in Raw Siliceous product (Granite & Sandstone) exports. - India ranks 5th in Raw Calcareous product (Marble & Flaggy Limestone)
exports. - India ranks 9th in exports of finished stone products
The bulk (90%) of the Indian stone exports is by way rough granite and marble blocks and only about 10% is by way of value added or branded products. Indian stone industry and the Government have set a target of raising this to 50% over the next 5 years. The bulk of the Indian stones are produced in the Indian states of Rajasthan, Tamilnadu, Karnataka and Andhra Pradesh. Rajasthan accounts for nearly 90% of all the marble produced and the other three states in Southern India produce almost all the granite exported.
STATISTICAL OUTLOOK
Major Importers
India possesses enormous deposits of all types of natural dimensional stones with a
- Dimensional blocks - Slabs and tiles - Monuments - Architectural and sculptured
pieces - Moulded pieces - Cobbles and pavement
stones - StoneHandicrafts/Artifacts
MARBLE INDUSTRY
Indian marble is highly acclaimed in the international market. World famous Taj mahal is testimony of exotic quality snow white marble from Makrana region.
Availability: In districts of Nagaur, Udaipur, Banswara, Jaipur Sirohi, Bhilwara, Ajmer, Bundi, Pali, Dungarpur,Chittorgarh, Jaisalmer and Sikar, Rajsamand, Alwar . Color & Pattern: Snow white, Creamish white, White with grayish/ black bands and Wavy patterns, pink, pink with bluish bands, green, yellow, black, multi-color etc. Export varieties: Snow white - very fine-grained, green and pink. Indian green is highly priced and is the most desired marble in demand the world over.
Number of mining leases: About 3600
Marble Processing Capacity: Slabs - 1000 million sq.ft. p.a.Tile - 300 million sq.ft. p.a.
Practically inexhaustible marble deposits -over 1200 million tons Splendid varieties of white, green, black, grey, pink, yellow Physical and mechanical properties complying with international
standards Amongst the top 5 countries in marble exports A Vibrant Industry
Total Investment - over Rs.40,000 million (US $1,000 million) About 4,000 mining leases Block production 3.7 million tons in 1996-97 About 1,100 modern gangsaw units and 50 Automatic tiling plants More than 5,000 trading companies Employing about 1 million people Fast developing modern mechanised quarries Over 300 quarries using diamond wiresaw & chainsaw cutter quarrying
technology Modern & well equipped factories with advanced Italian technology for
cutting, processing, polishing and handling Marble slab & tile production: 1300 million sq. ft per annum Impressive Marble Export Increase of over 300% from US $ 9 million in 1992-93 to US $ 27
million in 1996-97 Excellent quality export varieties - Green, Onyx, Indo Italian, White and
Pink marble High quality polished marble tiles & slabs and green & white marble
blocks correspond to demand in the foreign market High export demand for marble handicrafts Key marble export markets - USA, Canada, Japan, Singapore, UAE, EC
countries
Major Marble Centres of India
Prominent marble quarrying and processing centres in India are:
Rajasthan Udaipur-Rajsamand -Chittorgarh region Makrana-Kishangarh region Banswara - Dungarpur region Abu region Andhi (Jaipur) - Jhiri (Alwar) region Jaisalmer region
Gujarat Ambaji region Makrana-Kishangarh region
GRANITE INDUSTRY
Granite Ranks 1st in Raw Siliceous Exports in the world Exports valued at 244 million dollars in 1997-98 Widespread availability - Karnataka, Andhra Pradesh,
Tamilnadu, Orissa, Rajasthan, Utter Pradesh, Bihar, West Bengal
Estimated Geological Reserves - Over 5,000 million cubic metres
Important Quarrying & Processing Centres - Bangalore, Bellary, Hospet, Chamrajnagar, Chennai, Hyderabad, Warangal, Jhansi, Jalore, Pali, Barmer etc.
Magnificent Varieties - Merry Gold, Platinum White, Mokalsar Green, Rosy Pink, Nagina Green, Tiger Skin, Royal Gold, Jhansi Red, Galaxy Black, Kashmir White, Paradiso, Cira Grey, Juparana, Absolute Black, New Imperial Red, Raw Silk etc.
Availability: In districts of Barmer, Jalore, Pali, Sirohi, Alwar, Jaipur Jhunjhunu, Tonk, Ajmer, Bhilwara, Sikar and Udaipur.
Color & Pattern: Pink, Grey, Green, Multi-color, Bluish white, Red, Golden Cream, Paradiso Black, Banded with wavy pattern, white with spots etc.
Export varieties: Rosy Pink, Golden Pearl, Chima Pink, Anglo Grey, Royal Cream, Platinum white, Snow white, Tiger black, Imperial Pink, Mokalsar Green, Nagina Green, Jalore Pink, Kharda Red, Blue Pearl, Paradiso Red, Brownish Green, Jhunjhunu Red, Yellowish & Pink. Number of mining leases: 665 Geological Reserves: 1128 million Cu. M. Quality of Granite: Hardness 6 to 7 on Moh's scale Granite Processing Capacity: Slabs - 1.5 million sq.m.
Tiles - 5.0 million sq.m.
Sandstone
In India sandstone is extensively used in residential houses, office buildings, commercial complexes, hotels, restaurants and special monuments. Artefacts made of stone - screens, fountains, pedestals, columns, arches, balusters, railings -
have become popular. The present trend is to make these stone carvings in the best possible manner with man and machines. The recent example of the use of sandstone screens and columns was the renovation of Leela Palace Goa Resort in Goa, where the American architect decided to remove the existing granite/marble columns and decor and replace it with sandstone. Architects in Bahrain, Saudi Arabia and U.S.A have extensively promoted items made of sandstone. In the entire Middle East - Oman, Bahrain, UAE, Saudi Arabia and Kuwait – architects have used sandstone carved materials in residential villas. Even the architects from U.S.A. who are constructing villas in Saudi Arabia have used sandstone carvings. Some architects from Riyadh are very much fascinated with Indian sandstone architecture. In their each and every new creation, some stone carvings are used for their clients. They want century old stone art to be revived today.
Splendid Varieties: Rainbow, Teak, Modak, Kher, Budh, Bansi Pink, Mandana, Dholpur Red and Beige etc.
Estimated Geological Reserves: Over 1,000 million tons Production in 1997-98: Over 5 million tons Exports in 1997-98: US$ 2.5 million
FLAGGY LIMESTONE
Widespread availability - Rajasthan, Andhra Pradesh Color & pattern - Greenish Blue, Pale Brown & Black Important Quarrying & Processing Centres -
Ramganjmandi, Modak, Cuddapah Estimated Geological Reserves - Over 2,000 million tons Production - Over 2 million tons
Important Export Varieties: Kota blue, Kota Brown Etc.
Occurrence: In districts of Kota, - Chittorgarh & Jhalawar.
Important centres are Ramganj, Mandi, Suket, Chechat, Morak, Manpura
No. of Mining Leases: 130 Export Potential: In Europe, USA, Canada, Japan and Singapore.
SLATE
Occurrence: In districts of Alwar, Ajmer, Bharatpur, Tonk, Sawai Madhopur, Pali, Udaipur, Churu, Chittorgarh. However, slate deposits of Alwar district are of exportable quality.
Color & Pattern: Greyish black, multicolour, Brown, Red etc.
No. of mining leases: 32
Export markets: Holland, Germany, Australia, Japan and Singapore.
FOCUS ON THE MAJOR CITY: RAJASTHAN
Rajasthan is the major producer of Marble in India. Granite is produced in the states of Karnataka, Tamil Nadu, Andhra Pradesh, Rajasthan, Madhya Pradesh, Orissa & Uttar Pradesh.
Rajasthan's share in Indian Stone production
Mineral% of India's total production
Marble 91%
Kotahstone (Flaggy limestone)
90%
Sandstone 90%
Slate 10%
Granite 2.2%
COMPANY PROFILE
HISTORY OF THE COMPANY:
Kakatiya Overseas was incorporated in 2002, and was promoted by G.Rama Rao. It is a processors and exporters of natural stones.
ABOUT THE COMPANY:
Kakatiya overseas is one of the reputed Organization in Mining & Processing of Non-metallic minerals..It is a renowned name in the field of Quartz and Natural stones for its finest quality. They have The own rich quarries spread across South-India with Administration Office at Hyderabad. Kakatiyaoverseas having highly skilled manpower working as coordinated units in the state-of-the-art factory equipped with the latest machinery for the eco-friendly processing, produce highest quality products. There are Successful vendors for many buyers across the world especially in South-East Asia, European and American Continents.
Kakatiya Overseas has carved a niche for itself for producing world class natural stones. This company has grown into one of the country’s largest corporate houses to the exporting quality granite in a wide spectrum finish to customer’s world wide.
OFFICE:KAKATIYAOVERSEAS 127BKiranMansion,G-1 VengalaRaoNagar,Hyderabad AP, India
BOARD OF DIRECTORS:
G.Rama Rao. C.VINIL
BANKERS: HDFC ICICI.
COUNTRIES TO WHOM THEY EXPORT:
1. UK2. BELGIUM3. ITALY4. MOROCCO5. AUSTRALIA6. ALGERIA7. NETHER LANDS8.UNITED STATES OF AMERICA.9.Greece10.France11.UAEOBJECTIVE:
Established with a commitment to serve India’s Ornamental Stone IndustriesThat specialize in marbles, sandstone’s, slates, limestone, quartzite etc.,
All/India Natural Stones and Stone Association (AIGSA) has been serving India’s stoneand Allied Industries with a single track objective of our stone industries i.e. Granites,Marbles, Sandstone, Slates, Limestone’s and Ornamental Building Stones in anyform and its ancillaries Of Machinery too, Equipment, anything directly related to the stone.
Welfare:
Welfare activities include canteens supplying subsidized meals,
transport facilities, to employees.
Quality:
Standards and quality assurance group (SQAG) at kakatiya overseas is
a corporate quality assurance service facility. While the individual business
groups have their own quality control/quality assurance sections, this
corporate facility caters to the common requirements.
Faculty for training personnel in product divisions on ISO awareness
and on internal quality audits, helping in developing their quality system
documentation, planning, conducting and managing internal quality audits
and reporting of audit results.
RECEIPT DOCUMENTS:
CSRV : certified stores receipt voucher, which is issued by the stores
personnel to bills section in order to classify the material into Raw materials,
stores and spares, consumable tools, packing material, subcontractors
services, and other operational expenses, based on the purchased order, the
bills section does the provisional valuation by using fixed percentages for
freight, insurance and other incidentals and with regard to customs duty the
percentages as per tariff are adopted and the following entry proposed.
FLOW OR RECEIPT DOCUMENT (CSV)
Receipt of work order from Receipt stores.
Collection of data and Material for inspection
Material Inspection
Strategies:
Technical up gradation and R&D efforts.
Component Inspection report Given to head office for
Comments.
Material handed over to Receipt stores and shipped to nearest port.
Effective new markets and exports.
Gather delegation of authority and tuning up management information
system.
Diversification.
PRODUCT RANGE:
Natural stones being increasingly used by the construction industry is gradually replacing marbles and ceramic products due to its high durability and ability to give excellent garnish. Being a costly construction material , natural stones finds its Market in developing countries like Japan, Europe, and USA. Italy is the major market In this industry.
Indian natural stones is well accepted in the international market mainly because Of its better and uniform texture, grain and availability in variety of colors. India’s Share in the international trade, estimated at about RS.1000 Crores works out 1% And there is considerable potential for increasing the volume of granite exports from India. While the export potential for the slabs are satisfactory, the market for the Monuments is relatively competitive.
The company offers a wide variety of Stone Products to all the customers – “Quality Stones at Quantity rates”. They have a team of experienced professionals working throughout their locations looking after processing, dressing, inspecting and shipment of natural stones.
The usage of stone has been an integral part of human civilization and has played a pivotal role in shaping establishments. Continuing this tradition, The Company, excel as a supplier & exporter of varieties of natural stones. They have earned a respectable position in setting new heights in quality products, customer satisfaction and on-schedule delivery of the products.
They supply and export a comprehensive range of high quality natural stones such as sandstone, limestone,slate,granite and other construction and building stones for discerning buyers around the globe.
The major advantages of dealing is, as appreciated by their customers include faster inventory, less capital tied up in inventory & low total life cycle cost. All these result in increased profitability on the part of their customers.
They export of widely-acclaimed quality of different kinds of natural stones, such as:
Slate Stones Sandstone Limestone Granite
PRODUCT EXPORTED:
SAND STONE:
Sandstone is a Sedimentary Stone consisting usually of quartz, silica, iron oxide and calcium carbonate. These stones are durable, weather, acid and thermal resistant and have crushing strength. They come in many colors, shades. Cobbles of Sandstones are also very popular.
General Sizes available Undersize (In cms):Undersize :28 x 28, 42x42, 28 x 56, 56x56, 56x84, 56 x 112
Oversize : 30 x 30, 45x45, 30 x 60, 60x60, 60x90, 60 x 120 Thickness: 10-20 mm, 20-35 mm
Finish:
Natural Cleft both faces , One side Honed, Both sides Honed, Hand Cut/Machine Cut/Gangsaw Cut, Polished, Mirror Finish, Calibrated, Bullnosed, Rivetted.
LIMESTONE:
It is a sedimentary stone and mainly consists of Calcite. It has a smooth granular surface, does not show much graining or crystalline structure and varies in hardness. Some dense limestones can be polished. There are a number of varieties of lime stone and besides flooring has many other applications. The common colors are blue, grey, black, brown, and green.
Products Available:
Kota Blue, Kota Brown, Cuddapah Black, Lime pink, Lime Green, Shahbad Yellow.
Sizes available (In cms):30x30, 40x40, 30x60, 40x60, 60x60, 50 x50, 55x55,60x90 Flag stones.Thickness: 10-22mm, 20-30 mm, Calibration in 12 mm.
Finish:Natural Cleft both faces , One side Honed, Both sides Honed, Hand
Cut/Machine Cut/Gangsaw Cut, Polished, Mirror Finish, Calibrated.Cobbles of limestones are very popular.
SLATE:
Slate is a fine grained metamorphic stone that is formed from clay, sedimentary rock shell, and sometimes quartz. Characteristically the rock may slit into relatively thinner slabs. Slates find application in interiors and exteriors. It is extremely beautiful and more cost effective than most other wall and floor coverings. It renders a very graceful, natural finish to any building or home. The usual colours of slate are copper, gold, multicolor, black, dark grey, greenish grey, copper and purplish grey. Sometimes colour changes do occur due to weathering. The harder varieties of slate are used for flooring. Slate mines are found in North and Southern part of India. They look beautiful when used as a roofing slate.Products Available
*North Indian Slates:
Himachal White,Himachal Green, Himachal Black, Kund Peacock, Mau Multy, Khundrot,Jack Multy, Copper, Silver Grey, Zeera Green, Deoli Green, Golden, Oceanic, Silver Shine, Shimla White Mica, Jack Black, Multicolured, etc.
*South Indian Slates:
Sanjani, Indian Autumn, Vijay Gold, M Green , N Green, Taj Rose, Black Rustic, Indian Autumn Rustic, Chocolate, Multi Grey, Multi Pink etc.
Sizes available (In cms): 30x30, 40x40, 60x30 due to characteristics of product large sized slabs are not possible
GRANITE:
Granite is an Igneous Stone. It is primarily made of Quartz (35%), Feldspar (45%) and Potassium. Usually has darker colors. Contains very little calcite, if any. Provides a heavy crystalline and granular appearance with mineral grains. It is very hard material and easier to maintain. There are different types of granite depending on the percentage mix of quartz, mica and felspar.
Products Available :Over 34 different products in Slabs and Tiles . Tiles in Square size,
free lengths, odd sizes and foot strips. They can offer you Granite Vanity Tops,Bar Tops,etc., in prefabricated, precut, ready to install. They have CNC (Contouring) machine to do these jobs with perfection, which very few processors have in India.
*Sizes available Slabs :
Min. Size 260x140 cmsMax Size 300x170 cmsTiles: All sizes are available common being 305x305; 406x406; 457x457; 610x610.Thickness Slabs : 20 mm, 30mm Tiles: 10 mm, 12 mm, 15 mm 20 mm.
COMPANY TURNOVER :( SALES)
YEARS TURNOVER (Lakhs)
2004 5514
2005 6980
2006 6986
2007 10688
2008 11580
LIMITATIONS:
1.Longer delivery and payment time frames
2.Exchange rate risk and exchange controls.
3.Limited and costly dispute settlement and legal recourse options.
4.Lack of information. 5.Integrity (the quality of honest ) of Exporter.
6.Abolition of interest rate subsidy.
7.Huge foreign indebtness.
8.Unstable government.
9.Limited time durations.
10. Lack of access with the customers.
11. Limited Availability of information due to security problem.
INVENTORY MANAGEMENT @ PROJECT ANALYSIS IN
KAKATIYA OVERSEAS:
Before, an analysis is attempted for assessing for inventory control
measures at kakatiya overseas; it is proposed to present a summary on
material documentation and procedure. The main objectives of inventory
accounting and valuation of inventories are:
1. Accurate and regular recording of all transactions in the books.
2. Proper valuation of material receipts, issues returns and books.
SYSTEMS OVERVIEW:
The following systems are being followed in kakatiya overseas and the
main features of the systems are as follows:
1. Receipt vouchers are prepared on receipt of material.
2. Issue vouchers are prepared for all issues of out of stores.
3. All receipts, issue and returns are recorded in priced stores ledger.
4. Stock transfer voucher (STV) are used for recording transfer of raw
materials from one division/group to another. Transfers are made at
weighted average prices.
5. Finished goods delivery notes (FGDN) are used for transferring
finished production in shop floor to finished goods (FG) stores.
6. Physical verification is carried out at 6 regular internals and
discrepancies are and reconciled and recorded.
7. Work-In-Progress (WIP) valuation is as per the accounting policy of
the company.
8. Finished goods valuation is as per the accounting policy of the
company.
MATERIAL DOCUMENTATION AND COST CONTROL:
The material accounting and cost accounting system have been
designed within frame work of account codes and accounting policies, which
would facilitate identifying direct elements of costs, such as direct material,
direct labour and directly allocable expenses (such as expenses of
subcontracting)
Which are booked manually to the direct material? The following
documentation and system is being followed in kakatiya overseas
RECEIPT DOCUMENTS:
In this similar fashion, some other receipt documents and issued
documents are operated like:
1. CPRV (Cash purchase receipt voucher) for cash purchases receipt.
2.FGIN(finished goods issue note)the finished products particularly of
CG like hybrids , Networks and PCBs are consumed as raw materials in
other group for which a credit is given in the expenses of CG and stock of
that group is debited.
3. STV (Rs) stock transfer voucher: any stores useful for any group is
taken from other group from STV for which only stock accounts of the
divisions are operated.
4. MRNs (Material Return Note): The items lying unused at shop
floor after production activity is over are returned to stores under this
document.
Based on the documentation EDP generates the following printouts for
materials viz.
Priced stores ledger is brought out on monthly basis consisting on that
month’s receipts issues, balance stocks available values for raw materials,
stores and spares, consumable tools and packing materials.
Inventory is brought out on monthly basis comprising of material
codes is seriatim along with material , total value and also cumulative
receipts and cumulative consumption are indicated.
which are not moved for more than six months, are reported regularly
to the management for identification and necessary action. Further A, B, C,
D classified inventory report is also being submitted to group management
for their study and controlling purpose.
3.1 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 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 KAKATIYA OVERSEAS.
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”.
.
Types of study:
RAW MATERIALS:
An inventory of raw materials allows separation of production scheduling
from arrival of basic inputs to the production process. Factories affecting the
amount the raw materials inventory include proximately to the suppliers
relationship with the suppliers, predictability of the production process, lead
time required to place on order, and transportability and perishability of raw
materials.
WORK IN PROCESS:
An inventory of partially completed units allows the separation of
different phases of the production process, the amount of work in process
inventory is in past a function of the type of product, the measurement
period and the nature of the product process.
FINISHED GOODS:
An inventory of finished allows separation of production from
selling , with a stock of finished merchandised on hand a firm can fill order
as they are received rather than depend upon the completion of production to
satisfy customer demands.
FUNCTIONS OF INVENTORY:
The functions of the firm such as purchase of raw
materials ,processing, and having a finished goods available for sales, have a
sequential physical dependence maintenance of inventories allows the firm
to decouple those functions so that each can be planned, scheduled ,and
operated independently. For retail firms inventory provides customers with
selection choice and decouple the purchasing functions from the selling
functions.
3.2 NEEDS 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)
3.3 BENEFITS OF THE STUDY:
To ensure a continues supply of raw material to facilitate
uninterrupted production.
To maintain sufficient stock of raw material in periods of short supply
and anticipate price changes.
To maintain sufficient finished goods inventory for smooth sales
operations and efficient customer service.
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
KAKATIYA OVERSEAS and annual reports.
3.4 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 January 2, 2009 to March 10, 2009.
REVIEW OF LITERATURE:
For this purpose, previous abstracts on inventory management,
periodicals, academic journals. Articles will be reviewed in this section.
STATISTICAL TOOL TO BE APPLIED:
Sampling statistical techniques like percentages, bar graphs, averages,
chi-squares, and z-test may be applied based on the data collected for the
study.
3.5 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 in inventory to minimize
profitability.
Study of maintain optimum level of inventory investment.
The primary goal is to minimize inventory investment while still
meeting the functional requirements.
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.
INVENTORY MANAGEMENT
4.1. 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 mean a
reduction of liquidity and staring of other production processes; under-
stocking, 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 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.
4.2 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.
Impact of inventory on working capital
Inventories are a component of the firm’s working capital and, as
such, represent a current accounting cycle, which is normally one year.
1. A CURRENT ASSET: It as assumed that inventories
will be converted to cash in the current accounting cycle, with is
normally one year.
2. LEVEL OF LIQUIDITY: inventories are viewed a
source of 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 firm’s
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.
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 company’s 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 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 of 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.
4.3 INVENTORY-CORPORATE FINANCE:
Value of a firm’s 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 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 company’s 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 center’s 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 company’s 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 event-triggered
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 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 company’s 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 production is undertaken on order basis, in
these concerns there will not be a need for finished goods. The 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 smoothen 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 week’s 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 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
2 2
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 firm’s 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:
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.
4.4 RISKS AND COSTS OF HOLDING INVENTORIES:
The holding of inventories involves blocking of a firm’s 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
firm’s 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 customer’s
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:
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 company’s 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.” This production concept, which
originated in Japan and became immensely popular in American industries
in the early and mid-1990s, continues to be hailed by proponents as a viable
alternative for business looking for a competitive edge.
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 company’s 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.
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 company’s 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 company’s foundations. business consultants
and managers alike note that if an individual 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.”
4.5 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
company’s 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 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 soled 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 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 company’s 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 company’s cash flow. During
periods of 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 you’re 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.)
4.6 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:
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 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:
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 producer’s relevant standards.
By specifying/ providing engineering drawing/blue prints.
4.7 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.
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:
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