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 ofinventory, 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 ofinventories 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 ofmaterials 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 1
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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 thechapter 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
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)
• 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
Black & white Televisions have been in the Indian market from the
inception of TV into the Indian market. After two decades entered the colour TVswhich 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%, Onidawith 13% market share and Sansui with a share of 6%$ and the remaining market is
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 andthe 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 company’s fortunes positively.
Our report sheds light on all the industry’s 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.
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 aswell 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 labor-
cost 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 consumer-
electronics 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)
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 theUnited 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-the-
line 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 that’s 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 10
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 youlive, 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). Philipswas also instrumental in the revival of the Stirling engine.
Philips Radio
KOTTAM KARUNAKARA REDDY INSTITUTE OF TECHNOLOGY 11
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 maintaininginventory is to ensure proper supply of goods to customers. In some concerns the
KOTTAM KARUNAKARA REDDY INSTITUTE OF TECHNOLOGY 22
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.”
KOTTAM KARUNAKARA REDDY INSTITUTE OF TECHNOLOGY 26
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 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
KOTTAM KARUNAKARA REDDY INSTITUTE OF TECHNOLOGY 29
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 theorder 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:
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. Thedemand 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 38
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 orderingcosts. 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 firm’s 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,
KOTTAM KARUNAKARA REDDY INSTITUTE OF TECHNOLOGY 39
Every firm has to maintain a certain level of inventory of finished goods so asto 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 goodsof 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 41