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DEC9ARATION
I Sumit Soi, student of Si--im M)i.)! Ui/e+*ity, hereby
declare that the project work titled “A STUDY ON INVENTORY
MANAGEMENT IN COMPANY ” which is submitted to Sikkim
Manipal University in partial fulllment of the re!uirements for the
de"ree of Master of #usiness $dministration, is a record of ori"inal
research work done by me under the "uidance of, D+ P+)*2)t
S2)+m) of %ans Info&ech, that this is "enuine and has not been
submitted elsewhere for any other de"ree or diploma'
()$*+ $li"arh
Sumit Soni
-$&+
./)) 0/ 12322145
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ACNO;9EDGEMENT
I have prepared this study paper for the “A Study o I/eto+y
M))
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INTRODUCTION TO T0E STUDY Inventory is the business lar"est asset 'It is stock of item used in
business' Inventory represent one of most important asset that
most businesses posses, because the turnover of the inventory
represents one of the primary sources of revenue "eneration and
subse!uent earnin"s for the companyDs shareholder and owners'
Inventory is very vital to every company that is without inventory
no company would survive' Inventory is meant for EprotectionD
and for EeconomyD in cost'
@eepin" inventory of suFcient stock will help to face lead time
component, demand and supply Guctuation and any unforeseen
circumstance in the procurement of materials' &hou"h to have
inventory is must, inventory is such a thin" that will pile up and
creep into the area of prots to turn them as losses and can put
the company in red' It is therefore, necessary to have *ontrol over
inventory to save the company from pilin" up inventories and to
avoid losses' #etter said than done, is the word that suits
inventory *ontrol'
&he mana"ement of inventory is a key concern of all business' If a
companyHs inventory level is too low, it risks delays in fulllin" its
customerDs orders' If the inventory is too hi"h, it is tyin" up
dollars that can be better used in other areas' It also risks
obsolescence and spoila"e' Successful businesses keep their
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inventory turns hi"h, but also keep their service level at or above
the industry standard'
Inventory is a stock of "oods re!uired by an or"ani7ation for its
successful operation' Inventory refers to materials procured,
stored and used for day to day functionin" of the whole
or"ani7ation' Inventory is directly related to production and
marketin" department, still the nance department has to play a
vital role in the mana"ement of inventory' &he purpose of
inventory mana"ement is to keep stock in such a way that there
is no overstockin" or under stockin"'Inventory is one of the most epensive assets of many companies
representin" as much as 32J of total invested capital' Inventory
*ontrol relates to a set of policies and procedure by which an
industry determines which materials it will hold in stock and the
!uality of each that it will carry in stock'
Inventory is the lar"est item in the current assets cate"ory and
must be accurately counted and valued at the end of each
accountin" period to determine a companyDs prot or loss' So the
mana"ement of inventory is important' Inventory mana"ement is
the process of eFciently overseein" the constant Gow of units
into and out of an eistin" inventory'
Inventory mana"ement is a very important function that
determines the health of the supply chain as well as the impacts
the nancial health of balance sheet' +very or"ani7ation
constantly strives to maintain optimum inventory to meet its
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re!uirements and avoid over or under inventory that can impact
the nancial "ures'
OBJECTIVE O1 T0E STUDY
Inventories constitute the principal item in the workin" capital of
the majority of tradin" and industrial companies' In inventory, we
include raw materials, nished "oods, work in pro"ress, supplies
and other accessories' &o maintain the continuity in the
operations of business enterprise, a minimum stock of inventory
re!uired'
9owever, the physical control of inventory is the operatin"
responsibility of stores superintendent and nancial personnel
have nothin" to do about it but the nancial control of these
inventories in all lines of activity in which they comprise a
substantial part of the current assets is a fre!uent problem in the
mana"ement of workin" capital' Mana"ement of inventory isdesi"ned to re"ulate the volume of investment in "oods on hand,
the types of "oods carried in stock to meet the needs of
production and sales while at the same time, the investment in
them is to kept at a reasonable level'
NEED 1OR T0E STUDY Inventories perform certain basic functions which are of crucial
importance in the rmDs production and marketin" strate"ies'
+Kective *ontrol over the utili7ation of materials has much
bearin" on prot and here is an attempt to study the
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mana"ement of materials' &his study helps the company to
detect and evaluate its own stren"th and weakness and also "ive
recommendation for the better inventory mana"ement'
Aithout inventory mana"ement it would be diFcult for any
company to maintain *ontrol and be able to handle the needs of
customers' Inventories are necessary for a rm to operate
eFciently and almost all business transactions involve the
delivery of a product or services in echan"e of currency'
SCOPE O1 T0E STUDY
Inventory is the major element in the workin" capital of any
tradin" and manufacturin" concern' &he scope of the present
study etends to ensure proper inventory mana"ement and cost
*ontrol' It provides a "uideline for the mana"ement of the
materials of the company and helps to introduce necessary
chan"es as and where re!uired'
&he scope of inventory mana"ement concerns the ne line
between replenishment lead time, carryin" cost of inventory,
asset mana"ement, inventory forecastin", !uality mana"ement,
replenishment, returns and defective "oods and demand
forecastin"' #alancin" these competin" re!uirements lead to
optimal inventory levels, which is an on"oin" process as thebusiness need shift and react to the wider environment
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MANAGEMENT O1 INVENTORY
Inventories constitute the principal item in the workin" capital of
the majority of tradin" and industrial companies' In inventory, we
include raw materials, nished "oods, workLinLpro"ress, supplies
and other accessories' &o maintain the continuity in the operations
of business enterprise, a minimum stock of inventory re!uired'
9owever, the physical control of inventory is the operatin"
responsibility of stores superintendent and nancial personnel have
nothin" to do about it but the nancial control of these inventories
in all lines of activity in which they comprise a substantial part of
the current assets is a fre!uent problem in the mana"ement of
workin" capital' Mana"ement of inventory is desi"ned to re"ulate
the volume of investment in "oods on hand, the types of "oods
carried in stock to meet the needs of production'
CONCEPT O1 INVENTORY MANAGEMENT &he term inventory mana"ement is used in two waysL unit control
and value control' (roduction and purchase oFcials use this word in
term unit control whereas in accountin" this word is used in term of
value control' $s investment in inventory represents in many cases,
one of the lar"est asset items of business enterprises particularly
those en"a"ed in manufacturin", wholesale trade and retail trade'Sometimes the cost of material used in production surpasses the
wa"es and production overheads' 9ence, the proper mana"ement
and control of capital invested in the inventory should be the prime
responsibility of accountin" department because resources invested
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in inventory are not earnin" a return for the company' .ather, on
the other hand, they are costin" the rm money both in terms of
capital costs bein" incurred and loss of opportunity income that is
bein" fore"one'
OBJECTIVES O1 INVENTORY MANAGEMENT
&he basic mana"erial objectives of inventory control are twoLfold
rst, the avoidance overLinvestment or underLinvestment in
inventories and second, to provide the ri"ht !uantity of standard
raw material to the production department at the ri"ht time' In
brief, the objectives of inventory control may be summari7ed as
follows
A O.e+)ti< Ob>e7ti/e*:
6#8 E*u+i< A/)i!)bi!ity o, M)te+i)!*: &here should be a
continuous availability of all types of raw materials in the
factory so that the production may not be help up wants of
any material' $ minimum !uantity of each material should
be held in store to permit production to move on schedule'
6?8 A/oid)7e o, Abo+m)! ;)*t)
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)eaka"e, theft, embe77lements of raw material and spoila"e
of material due to rust, bust should be avoided'
648 P+omotio o, M)u,)7tu+i< E@7ie7y: If the ri"ht type
of raw material is available to the manufacturin"
departments at the ri"ht time, their manufacturin" eFciency
is also increased' &heir motivation level rises and morale is
improved'
6$8 A/oid)7e o, Out o, Sto7- D)e7ti/e*:
6#8 E7oomy i .u+72)*i
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6?8 Re)*o)b!e P+i7e: Ahile purchasin" materials, it is to be
seen that ri"ht !uality of material is purchased at reasonably
low price' Buality is not to be sacriced at the cost of lower
price' &he material purchased should be of the !uality alone
which is needed'
648 O.timum I/e*ti< )d E@7iet U*e o, 7).it)!: &he
basic aim of inventory control from the nancial point of view
is the optimum level of investment in inventories' &here
should be no ecessive investment in stock, etc' Investment
in inventories must not tie up funds that could be used inother activities' &he determination of maimum and
minimum level of stock attempt in this direction'
TYPES O1 INVENTORY
Mo/emet i/eto+ie*
Movement inventories also called as transit or pipelineinventory' (ipeline inventory eist because material cannot be
transported instantaneously between point of supply and point
of demand'
Bue+ i/eto+ie*
#uKer inventory also called as safety inventory' Its purpose is
to compensate for unepected Guctuations in supply anddemand as well as unpredictable events such as poor delivery
reliability or poor !uality of supplierDs products' ?enerally
hi"her the level of buKer inventory, the better the rmDs
customer service'
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Cy7!e i/eto+y
It is held for the reason that one or more sta"es in the process
cannot supply all the items it produces simultaneously' &his
type of inventory result from the need to produce products in
batches and amount of it depends on volume decisions'
De7ou.!i< i/eto+y
Inventory is used to allow work centers or processes to operate
relatively independently' Ahen such inventory are held even if
a machine breaks down the work would not stop
• Ati7i.)tio i/eto+y &his type of inventory is accumulated to cope up with epected
future demand or interruption in supply' It is a way for
manufacturers to maintain consistent operations when the
demand for the product is low'
NEED TO 0O9DING INVENTORIES
Maintainin" inventories involves tyin" up of the companyDs funds
and incurrence of stora"e and handlin" cost' If it is epensive to
maintain inventories, why do companies hold inventoriesN &here
are those "eneral motives for holdin" inventories
T+)*)7tio moti/e
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$ccordin" to this s motive, an enterprise maintains inventories
to avoid bottlenecks in its production and sales' #y maintainin"
inventories, the business ensures that production is not
interrupted for want of raw materials, on the other hand and
sales also are not aKected on account of nonLavailability of
nished "oods, on the other'
P+e7)utio)+y moti/e
Inventories are also held with a motive to have a cushion
a"ainst unpredicted business' &here may be sudden and
unepected spurt in demand for nished "oods at times'Similarly, there may be unforeseen slump in the supply of raw
materials at a time' In both cases, a prudent business world
surely likes to have some cushion to "uard a"ainst the risk for
such unpredictable chan"es'
S.e7u!)ti/e moti/e
$n enterprise may also hold inventories to take the advanta"eof price Guctuation' Suppose, if the prices of raw materials are
to increase rather steeply the enterprise would like to hold
more inventories than re!uired at lower prices'
1ACTORS IN19UENCING INVENTORY
&he inventory mana"ement of an or"ani7ation has an impact onthe whole system'
“9ow much to buy at onetime” and “when to by this !uantity”'
&his two fundamental thin"s on which inventory *ontrol depends'
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Many factors "overn these fundamental thin"s' &he prime factors
that "overn these two fundamental thin"s are
• .e!uirements
•
Buality in stock or on stock• )ead time
• /bsolesce
ADVANTAGES O1 INVENTORY CONTRO9
9ere are the followin" advanta"es of inventory controlL
• .eduction in investment in inventory'
• (roper and eFcient use of raw materials'• 0o bottleneck in production'
• Improvement in production and sales'
• +Fcient and optimum use of physical as well as nancial
resources'
• /rderin" cost can be reduced if a rm places a few lar"e orders
in place of numerous small orders'
•
Maintenance of ade!uate inventories reduces the setLup costassociated with each production run'
RIS AND COST ASSOCIATED ;IT0
INVENTORIES
9oldin" of Inventories epose the rm to a number of risks and
costs'M)>o+ +i*-* )+e )* ,o!!o*3
6)8 P+i7e de7!ie &hey may be due to increase in market supply
of the product, introduction of a new competitive product,
priceLcut by the competitors etc'
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6b8 P+odu7t dete+io+)tio: &his may due to holdin" a product
for too lon" a period or improper stora"e conditions'
678 Ob*o!e*7e7e: &his may due to chan"e in customerDs taste,
new production techni!ue, improvements in product desi"n,
specications etc'
T2e Co*t* o, 2o!di< i/eto+ie* )+e )* ,o!!o*3
6)8 M)te+i)! Co*t: &his include the cost of purchasin" the "oods,
transportation and handlin" char"es less any discount allowedby the supplier of "oods'
6b8 O+de+i< Co*t: &his includes the variables cost associated
with placin" an order for the "oods' &he fewer the orders, the
lower will be the orderin" costs for the rm'
678 C)++yi< Co*t: &his includes the epenses for storin" and
handlin" the "oods' It comprises stora"e costs, insurance
costs, spoila"e costs, cost of funds tied up in inventories etc'
ESSENTIA9 O1 INVENTORY CONTRO9 SYSTEM
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code number and it must be classied in suitable "roup or
subLdivisions' $#* analysis of material is very helpful in this
contet'
6?8 St)d)+di)tio )d *im.!i7)tio o,
i/eto+ie*: In order to facilitate inventory control, the
inventory line should be simplied' It refers to the
elimination of ecess types and si7es of items' Simplication
leads to reduction in classication of inventories and its
carryin" costs' Standardi7ation, on the other hand, refers to
the ation of standards of raw material to be purchased andspecication of the components and tools to be used'
648 Setti< t2e M)Fimum )d Miimum !imit*
,o+ e)72 .)+t o, i/eto+y: &he third step in this process
is to set the maimum and minimum limits of each item of
the inventory' It avoids the chances of overLinvestment as
well as runnin" a short of any item durin" the cost of
producin"' .eorderin" point should also be ed beforehand'
6$8 E7oomi7 O+de+ u)tity: It is also a basic
inventory problem to determine the !uantity as how much to
order at a time' In determinin" the +/B, the problem is one
to set a balance between two opposite costs, namely,
orderin" costs and carryin" costs' &his !uantity should be
ed beforehand'
6&8 AdeHu)te *to+)
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SuFcient stora"e area and proper handlin" facilities should
be or"ani7ed'
68 AdeHu)te Re.o+t* )d Re7o+d*: Inventory
control re!uires the maintenance of ade!uate inventory
record and reports' %arious inventory records must contain
information to meet the needs of purchasin", production,
sales and nancial staK' &he typical information re!uired
about any class of inventory may be relatin" to !uantity on
hand, location, !uantities in transit, unit cost, code for each
item of inventory, reorder point, safety level etc' Statementsforms and inventory records should be so desi"ned that the
clerical cost of maintainin" these records must be kept a
minimum'
658 Ite!!i
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departments have diKerent outlook and objects in inventory
mana"ement but nancial mana"er has to coordinate them
all'
6'8 Bud
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S.e7i7 1)7to+*: &hese factors are directly related with
investment in stock'
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68 Time 1)7to+: &he lead time of raw material time token in
production process and sale of product also inGuence
investment in inventories' )on"er the period, hi"her will be
the investment in inventories'
658 9o) 1)7i!itie*: If raw materials are purchased on credit or
loan from the bank or other nancial institution can be
obtained on the security of raw material, lesser investment
would be re!uired' In the absence of such loan facility, hi"her
investment would be re!uired'
6(8 P+i7e 9e/e! 1!u7tu)tio*: If there are epectations of pricerise in future then raw materials may be store in hi"h
!uantity and so more investment would be re!uired' /n the
contrary, if the prices of raw materials are epected to "o
down in future, then comparatively lesser investment would
be re!uired'
INVENTORY CONTRO9 TEC0NIUES
Inventory is bein" maintained as a cushion in supply of materials
for continuous production without causin" stock out situation' &his
cushion should not be suicidal to any or"ani7ation' &he followin"
scientic techni!ues and methods are bein" used in control of
inventory'
1' Inventory Mana"ement &echni!ues6' Standardi7ation8' Selective Inventory *ontrol' ;ust In &ime3' (erpetual Inventory System=' Inventory &urnover .atio
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# INVENTORY MANAGEMENT TEC0NIUES
I ECONOMIC ORDER UANTITY:3
If the rm is buyin" raw materials, it has to decide lots inwhich it has to be purchased on replenishment' If the rm is
plannin" a production run, the issue is how much production
to schedule' &hese problems are called order !uantity
problems and the task of the rm is to determine the
optimum or economic order !uantity'6)8 O+de+i< 7o*t
&he term orderin" cost is used in case of raw materials andincludes the entire cost of ac!uirin" raw materials'
6b8 C)++yi< 7o*t :*ost incurred for maintainin" a "iven level of inventory is
called carryin" cost'
+conomic /rder Buantity is "iven by the formula
EO √ 2 AO /C
$nd the cost of inventory is "iven by formula
Tot)! 7o*t o, i/eto+y O 6A F P8 6A F 8KEO 6EO F C8K
?
Ahere, $O $nnual *onsumption Pin unitsQ
/O /rderin" cost per order Pin .sQ
*O *arryin" cost per unit Pin .sQ
(O (rice per unit Pin .sQ
II Reo+de+ Poit
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&he reorder point is that inventory level at which an order
should be placed to replenish the inventory '&o determine
reorder point
PaQ )ead time is the time normally taken in replenishin"inventory after the order has been placed'
PbQ $vera"e usa"ePcQ +conomic order !uantity
III S),ety *to7- &he demand for material may Guctuate from day to day' &he
actual delivery time may be diKerent from the normal lead time' If
the actual usa"e increases or the delivery of inventory is delayedthe rm can face problem of stock out, which can be costly' So, in
order to "uard a"ainst the stock out the rm may maintain a
safety Stock'
? STANDARDILATION :Standardi7ation is very essential to control the inventory, as by
standardi7ation reduction in variety of materials is possible' $nd
because of the reduction in variety the advanta"es are low cost,
low inventory, less stora"e stocks, conservation of materials,
variety reduction, less paper work, easily follow up with suppliers,
less number of orders' &he importance of this eld has been reco"ni7ed since the days of
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4 SE9ECTIVE INVENTORY CONTRO9 MANAGEMENT$ny manufacturin" or"ani7ation consumes few thousand items of
stores' $ hi"h de"ree of control of inventories of each item would,
therefore neither be practical considerin" the work involved, nor
worthwhile since all items are not of e!ual importance' 9ence it is
desirable to classify or "roup items to control commensurate with
importance' &his is the principle of selective control as applied to
inventories and the techni!ue of "roupin" is termed as selective
techni!ue'
Selective inventory means variation in the methods of inventorycontrol from item to item and this diKerentiation should be on
selective basis by classication' $ company has to stock
thousands of items of raw materials, standard parts, stores and
spares, sub contract items, tools, stationary etc' &o have better
control over the inventoryR stock on hand, selective inventory
control techni!ue should be used in isolationR or in conjunction'
&hus, selective control means selectin" the area of control so that
re!uired objective is achieved as early as possible without any
lost of time due to takin" care of full area• Minimum loss of ener"y and eKorts'
• $t maimum cost without loss of time'
&here are followin" selective control techni!ues
• $#* $nalysis
•
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$#* $nalysis is a selective control techni!ue which is re!uired to
be applied when we want to control value of consumption of the
items in .upees obviously when we want to control value of the
consumption of the material we must select those materials
where consumption is very hi"h'
In any company manufacturin", there are number of items which
are consumed or traded it may run into thousands' It is found
after number of studies for diKerent companies that
%alue of
consumption of items Pvalue in .s Q
0o' of items ?rade
>2J of consumption 12J of no' of items $62J of consumption 13J of no' of items #12J of consumption >3J of no' of items *
A item* these are those items which are found hardly 3J 12J
but their consumption may amount >2J >3J of the total money
spend on materials'
B item* these are those items which are "enerally 12J 13J of
the total items and their consumption amounts to 12J 13J of the
money spend on the materials'
C item* these are lar"er number of items which are cheap and
inepensive and hence insi"nicant' &hey are lar"e in number of
runnin" into hardly 3J 12J of the total money spends on the
materials'
A C!)** Item*
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/)!ue8 /)!ue8%ery strict control Moderate control )ose control0o safety stocks or
very low safety
stocks
)ow Safety stocks 9i"h safety stocks
Maimum follow up
and epeditin"
(eriodic follow up
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&hus, stores department whoDs concerned with the movin" of
items would like to know and classify that the items are storin" in
the cate"ories
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since their consumption may not be fre!uent and their value may
not be hi"h'
78 =YL ANA9YSIS
&his type of analysis is carried out from the point of view of value
of balance stocks lyin" in the stores from time to time and
classies all the items as "iven below'
= item* are those items whose value of balance stocks lyin" in
the stock is very hi"h'
Y item* are those items whose value of balance stock ismoderate'
L item* are those items whose value of balance stock lyin" in
the stocks is very low'
$fter knowin" this type of classication and their items can be
taken to control the situation as shown belowo
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stocks can be reduced' &hus proper inventory control
procedures can be developed on the basis of T:C analysis'
&hus proper selective control methods should be selected to
control the materials and prevent from facin" loss, takin"
advanta"e and knowin" what eactly is to be done'
d8VED ANA9YSIS
VED ))!y*i* is carried out to control situation, which are critical'
Ahen applied to material in %+- analysis we try to identify
material accordin" to their criticality to the production, whichmeans the material, without which the production will come to
stop and so on from this point of view material classied in three
cate"oriesL
%L %ital
+L +ssential
-L -esirable
%ital cate"ories of the items are those items for the want of which
the production will come to stop'
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e80M9 ANA9YSIS
&his analysis, analysis the material accordin" to their prices and
then classies them as 9 item or M item or ) items'
9 stands for hi"h price,
M stands for medium price and
) stands for low price'
Since price is more concerned of purchase department mostly
purchase department people analyses the material accordin" to
9M) analysis'
9M) analysis must be carried out from any one of the followin"objectives or some of the objective as the case may be
• Ahen it is desire that purchasin" responsibility should be
dele"ated to ri"ht level of people'
• Ahen it is desired to evolve purchasin" policies then also 9M)
analysis is carried out i'e' whether to purchase in eact
!uantities as re!uired or to purchase in +/B or purchase only
when absolutely necessary'
• Ahen the objective is to keep control over consumption at the
department level then authori7ation to draw materials from the
stores will be "iven to hi"h level 9 item, low level for ) items
and medium level for M items'
• Ahen it is desired to decide fre!uency of stock takin" then very
fre!uently 9 cate"ory, very rarely ) cate"ory and avera"ely M
cate"ory'
• Ahen it is desired to arran"e security arran"ements for the
items, then 9 items under lock and key, ) items keep open on
the shop Goor and under supervision for M items'
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$ JUST IN TIME INVENTORY SYSTEM
@eepin" in view the enormous carryin" cost of inventory in the
stores and "o downs, manufactures and merchandisers are askin"
for more fre!uent deliveries with shorter purchase order lead
times from their suppliers' &oday or"ani7ations are becomin"
more and more interested in "ettin" potential "ains from makin"
smaller and more fre!uent purchase orders' In other words, they
are becomin" interested in just in time purchasin" system' ;ust in
time purchasin" P;I&Q is the purchasin" of material or "oods in
such a way that delivery of purchased items is assured beforetheir use or demand'
;ust in time purchasin" reco"ni7es too much carryin" costs
associated with holdin" hi"h inventory levels' &herefore, it
advocates developin" "ood relations with suppliers and makin"
timely purchases from proven suppliers who can make ready
delivery of "oods available as and when need arises' +/B model
assumes a constant order !uantity whereas ;I& purchasin" policy
advocates a diKerent !uantity for each order if demand
Guctuates'+/B lays emphasis on orderin" costs to include
purchase costs !uality costs and stock out' ;ust in time purchasin"
takes into consideration all these costs and move outside the
assumptions of the +/B model'
$dvanta"es of ;I& purchasin"
1' Investment in inventory is reduced because more fre!uent
purchase orders of small !uantities are made'
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6' *arryin" cost is reduced as a result of low investment in
inventory'8' $ reduction in the number of suppliers to be dealt with is
possible' /nly proven suppliers who can "ive !uick delivery of !uality "oods are "iven purchase orders' $s a result of this
reduction in ne"otiation time is possible' &he use of lon" run
contracts with some suppliers with minimal paper work
involved is possible'' Buality costs such as inspection cost of incomin" materials or
"oods, scraps and rework costs are reduced because ;I&
purchasin" assures !uick and fre!uent delivers of small si7e
orders which results in low level of inventories causin"
minimum possible wasta"e' &herefore, ;I& purchasin" is
fre!uently applied by or"ani7ations dealin" in perishable
"oods'& PERPETUA9 INVENTORY SYSTEM
&he *hartered Institute of Mana"ement $ccountants, )ondon,
denes the perpetual inventory as “a system of records
maintained by the controllin" department, which reGects the
physical movements of stocks and their current balance”' #ind
cards and the stores led"er help the movements of the stock on
the receipts and in maintainin" this system as they make a record
of to physical movements of the stock on the receipts and issues
of the materials and also reGect the balance in the stores' &hus, it
is a system of ascertainin" balance after every receipt and issue
of every material throu"h stock record to facilitate re"ular
checkin" and to avoid closin" down the rm for stocktakin"' &o
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ensure the accuracy of perpetual inventory records Pi'e' #ind card
and stores led"erQ, physical verication of the stores is made by
#ind cards and store led"er may diKer from the actual balance of
stock as ascertained by physical verication' It may be done to
the followin" avoidable and unavoidable causes'
INVENTORY TURNOVER RATE TEC0NIUE
/ne important techni!ue of inventory control is to use inventory
turnover ratios' &hese ratios are calculated to assess the
eFciency in use of inventories'
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PiQ A/e+)
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in this study deals with the importance and necessity for
inventory mana"ement in an or"ani7ation'
Inventory mana"ement can help business to be more protable
by lowerin" their cost of "oods sold and by increasin" sales'
Inventory mana"ement is re!uired at diKerent locations of a
supply network to protect the re"ular and planned course of
production a"ainst the random disturbance of runnin" out of
materials or "oods''
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companies' Inventory mana"ement can help make it so that a
company has the eact inventory needed' 0o more, no less'
Inventory mana"ement is also an eKective way to keep track of
eactly what products a company has'
• P2i!i. S!)te+ 6?%%58 in his article PI/eto+y M))
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either producin" only when you actually have an order P;I&Q or
by achievin" more accurate demand projections'• +perts ar"ue that inventory levels should decline markedly as
a result of the implementation of improved inventorymana"ement systems such as ;I&' $ paper by R)>)
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• Ad)m J 1ei in his article Bui!di< ) 9e) Su..!y C2)i
6?%%8 said that “there is a widely held, but inaccurate,
perception that new technolo"ies have led directly to declines
in the inventoryLtoLsales ratio, an important indicator of “buKer
inventory” in the supply chain ' in theory, information
technolo"yLbased supply chain practices such as justLinL
timeP;I&Q inventory mana"ement, warehouse automation, and
the introduction of bar codes should have allowed companies
to improve their mana"ement of orders and stockpiles of
materials'• B+u7e D C)!de!! 6?%%'8 has mentioned some benets of
$#* $nalysis in his article T2e Beet* o, ABC A)!y*i* ,o+
I/eto+y Redu7tio' Usin" the”$#*” concept to analy7e
*ontrol inventory investment and turns is the simplest and
most eFcient method' Most inventories are made up of
hundreds and possibly thousands of individual items necessary
to manufacture a companyDs products'
• A*2)t2)..) P+odu7tio* )d O.e+)tio* M))
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• Ju2i Go)!e* in his article I/eto+y Cot+o! 6#'''8 says
inventory mana"ement is makin" sure that items are available
when customers call for it, but not too much stock , so that
inventory turnover "oals are met'• B)+di) in A77outi< Ad 1i)7e 1o+ M))2J with an increasin" trend durin" the
period of study'
• J)i in his book T2e ;o+-i< o, Sto7- EF72)
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the structure of inventory reveals that there was overstockin"
with re"ards to each and every component overstockin" with
re"ards to each and every component of inventory in the
undertakin"s selected for study'• Mo2) Reddy in M))
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forms of increased revenue and prots, positive employee
atmosphere, and an overall increase of customer satisfaction'• ML B)b)i )d Y D)!!e+y IESM 6M)y ?%%&8 the literature
dealin" with inventory mana"ement policies is very rich andhas "rown fast durin" the last year they classify these policies
into 6 approaches accordin" to the type of demand
information' In the rst approach the policies suppose that
there is no advance demand information and the decisions are
made in real time usin" the inventory depletion'
RESEARC0 MET0ODO9OGY
INTRODUCTION
.esearch is a systemati7ed eKort to "ain new knowled"e'
.esearch is an art of scientic investi"ation' $ccordin" to *liKord
woody, .esearch comprises, denin" and redenin" problems,
formulation hypothesis of su""estion solution, collectin",
or"ani7in" and evaluatin" to determine whether they t the
formulation hypothesis'
$ research is the systematic investi"ation into and study of
materials and sources in order to establish facts and reach new
conclusion'
RESEARC0 DESIGN
&he research desi"n used as analysis in nature of analytical' $
research desi"n is the determination and statement of "eneral
research approach or strate"y adopted for a particular project'
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It is the heart of plannin"' &he research desi"n adopted for the
study is analytical in nature' It is the specication of methods and
procedures for ac!uirin" the information needed' &he research
desi"n used in the study is descriptive research'
DATA CO99ECTION
&he source which are used mainly on secondary sources of data
which is collected from the audited books of accounts of
or"ani7ation, annual reports and nancial statements prepared
and published by the concern ;ournals , books and websites havebeen referred to have an overview about the company'
TOO9S USED
o
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• $ccuracy and correctness of tools like ratio analysis is
depends upon the accuracy of published accounts'
• &he time available for the study was another constrainin"
factor'
• &he inventory mana"ement of or"ani7ation is limited to the
etent of information made available throu"h published
documents and personnel discussion'
OBJECTIVES O1 INVENTORY CONTRO9 IN
ORGANILATION
&he main objectives of Inventory control are
&o reduce capital locked up'
&o ensure that production does not suKer
&o ensure that sale of nished "oods is not aKected
&o avoid wide Guctuations in production'
&o study the Inventory Mana"ement the several of interview
techni!ues dependin" on the situations were followed'
-iscussions were carried out with various personnel of the
company to study the followin" 8 broad areas'
$' (U.*9$S+ */0&./)
#' S&/.$?+ */0&./)
*' A$.+9/US+ S:S&+M W (./*+-U.+
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&o study the above a relationship and link was sou"ht between
theory and practice' $n evaluation was done to each sta"e and
su""estions were also made to improve the eistin" Inventory
control system'
A PURC0ASE CONTRO9
I Pu+72)*e De.)+tmet3
&he prime responsibility of (urchase -epartment is to arran"e
supply of various raw materials, consumables, spare parts etc' to
the plant for the production purpose and to the other
departments for maintenance and operation purpose' &he
materials should be procured at the ri"ht prices from ri"ht source
of supply'
II Pu+72)*e P+o7edu+e3
&he followin" are some of the essential steps in this re"ard'
6)8 Re*.o*ibi!ity ,o+ Pu+72)*e* 3 1u7tio*
$ll purchase functions shall be the responsibility of the Materials
Mana"er posted in the plant' &he purchase functions in other
oFces shall be handled by one sin"le oFce
nominatedRdesi"nated for the purpose' &he indenters from
various departments should refrain from issuin" in!uiries, invitin"bids enterin" into correspondence or ne"otiation with
vendorsRcontractors' $ll re!uisitions for purchase duly processed
in accordance with the procedure laid down, hereinafter should be
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forwarded to Materials Mana"erR-esi"nated oFcer for necessary
action'
6b8 Re
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re!uisition for purchase should be completed in all respects with
re"ard to
• -escription of the materialRe!uipmentRscope of work'
• Material of constructionRspecication
• &emperatureR(ressureRStandard if anywhere applicable'
• Buantity and unit of measurement'
• -ate when delivery of materialRservices is re!uired'
• 0ame of vendor in case of the item is of proprietary nature'
• +stimated value and bud"et head'
• Ahether item is a stock itemRnonLstock item'
&he re!uisition for purchase of materials which have been
declared as “stockLitem” will be raised by the stores -epartment
after the !uantity in stock has reached the “.eLorder level” as
determined for the respective items'
Such re!uisition amon"st other particulars should also indicate
the “minimum”, “maimum” and “reLorder level” the date on
which last supply was received and the avera"e consumption per
month since last purchase'
&he re!uisition for purchase of “nonLstock” items will be invariably
rooted throu"h the StoreDs -epartment which will endorse on the
re!uisition, the availabilityRnonLavailability' In case the item is
available, the !uantity there of be indicated on the purchase
re!uisition so that the !uantity to be purchased can be adjusted
by the Materials Mana"er in consultation with the indenter'
=
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&he re!uisition for purchase of capital items award of *ivil Aork,
erection contracts, contracts for repairs to plant and machinery
and e!uipment handlin" and transportation of materials,
repairRservicin" of e!uipment hirin" of casual labors' Selection of
contractors for repairRmaintenance of township and plant
buildin"s, mechanical, electrical, isolation, provision of other
services and paintin" jobs on schedule of rate valid for one year
will be sent directly to the Materials Mana"er after the same are
approved by the competent authority'
$ll re!uisitions for purchase of materials or for award of work asdescribed above will be raised by the respective departments'
&he -epartment Mana"er would ensure that the purchase
re!uisitions must indicate
• &he bud"et provision' P&his will be checked by
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issue a report by the 13th of the followin" month listin" out the
re!uisitions received durin" the previous month and their current
status and mail the same to the respective Indentin"
-epartments' $ copy of these reports will be put to the ?eneral
Mana"er for his information' &he Indentin" -epartments will
review the report from the (urchase -epartment and shall ensure
that the missin" re!uisitions are traced and are handed over to
the (urchase -epartment promptly'
6e8 EHui+ie*KI/it)tio to Bid/n receipt of the re!uisitions from the various departments,
en!uiries are issued by the (urchase -epartment as per the
procedure detailed below
• +n!uiries to be issued in the prescribed (erforma'
• +n!uiry document is suitably modied to conform to the
materialRservices proposed to be procured'• +n!uiry document describes in detail the description of the
materialRservices the technical specications etc'
• &he delivery time and the various "eneral and special terms
and conditions "overnin" the purchaseRwork'
&he idea in prescribin" the minimum number of vendors to whom
en!uiries to be issued and bids to be obtained is to create a
healthy competition amon"st the bidders, so that society is able
to procure materials and services at the most economical price'
/pen tenders are invited for selectin" contractors for performin"
maintenance work, relatin" to civil, mechanical electrical and
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instrumentation work a"ainst a rate contract PS/.Q which will be
renewable every year' (ress tenders for selectin" such contractors
will be advertised in one of local +n"lish and another in local
lan"ua"e paper which has a "ood circulation where fabrication of
e!uipment or major repairs to plant and machinery are involved,
the en!uiry Goated to all the major fabricationRrepair shops for
determinin" the number andRor mode of en!uiry to be issued the
re!uisition is evaluated on the basis of last purchase order or the
present estimated market value of the materialRe!uipment
whichever is more'0otwithstandin" the for"oin", invitation of bids by press tender
will not be necessary in respect of
1Q (urchase of proprietary items
6Q Items, the prices of which are ed by the ?overnment'
8Q Items, the import of purchase of which is canali7ed throu"h a
?overnment -epartment or public sector undertakin" and
Q Items, standardi7ed for particular brandRmake'
3Q 9owever, all purchases of proprietary items and such other
items the prices of which are ed by the ?overnment will
re!uire prior approval of the Mana"in" -irectorR+ecutive
*ommitteeR#oard of -irector if the value of such purchase
eceeds the dele"ated authority of the ?eneral
Mana"erR?roup Mana"er'
&he competent authority, if he is satised may waive the
advertisement of tenders for such purchases, the value of which
does not eceed the power dele"ated to him for makin"
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purchases' &he ?eneral Mana"erR?roup Mana"ers will obtain prior
approval of +'-'RMana"in" -irector for waivin" advertisement of
tenders where the purchase eceeds his dele"ated authority' &he
?eneral Mana"erR?roup Mana"ers may however waive
advertisement of tenders in ecess of their dele"ated authority of
the purchase is re!uired to be made to meet an emer"ency in the
plant' In such cases post facto approval of the Mana"in" -irector
may be obtained later' 0ormally, such waivers may be resorted to
in the case of purchase of proprietary items or to cater to an
emer"ency in the plant whenever the competent authority waivesadvertisement in the press for invitin" bids, reasons are recorded
in writin"' $ monthly report on such waivers is submitted to the
Mana"in" -irector for his information by 13th of the followin"
month' 0I) report should also be submitted in case there was no
waiver durin" the precedin" month'
If the tender proposal to be advertised is for a work which
involves desi"n and en"ineerin" amon"st other thin"s' It would
be preferable if the bids are invited in two parts vi7' PaQ &echnical
and commercial unpriced bid and PbQ (riced bid' &he date of
openin" the priced bid is ed later than unpriced bid'
6,8 Time A!!oed ,o+ Submi**io o, Bid*
0ormally 6L8 weeks time is "iven to the vendors for submittin"
their bids' In case of en!uiries for en"ineerin" civil and fabrication
works where calculation is involve and it is not feasible to obtain
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the bids early' &he time limit for submission of bids may be
increased to four weeks'
#idders are advice to indicate on the envelopes containin" the
bid, the en!uiry number, the date and time of openin" the bid'
&he bids shall be addressed to Materials Mana"er or such other
oFcer nominated to perform purchase functions'
+tension in due date may be done in consultation with indentin"
department, if inade!uateRno response to en!uiry'
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&he bids received a"ainst the open tender are opened on the date
and the time stipulated in the tender document as under
• $ll advertised bids to be opened publicly'
• #ids not advertised PpublishedQ but where estimated value is
more than .s'3 lakh bids should also be opened publicly'
•
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is opened' In case any bidder wants to reviseRalter the bid, he can
do so and submit the chan"es in the price in a closed envelope
before the due date' &he commercial bid alon" with any revision
is opened on the appointed day and time in the presence of
bidders who wish to be present'
6i8 9)te I/)!id )d U*o!i7ited Bid*
$ll bids received after the openin" of bids are treated as X)ateL
bidsD and will be i"nored' $ll late bids are returned to bidders unL
opened' #ids which are not accompanied by the prescribedearnest money deposit will be treated as XInvalid #idsD and will be
endorsed as such' &he tender documents stipulate that earnest
money can be deposited either in cash or by a #ank -raft or in
form of #ank ?uarantee in the prescribed (erforma attached to
the tender document' XUnsolicited #idsD are not considered not be
opened and even thou"h they may be the lowest will not be
entertained'
6>8 uot)tio Com.)+i*o St)temet 6CS8
$fter the tenders are opened a Buotation comparison statement
PB*SQ is prepared by the (urchase -epartment' $ll the bids
received are listed in the B*S' InLvalid bids are listed in a
separate statement and attached to the B*S' &he B*S is checked
by an oFcial of the (urchase -epartment Pnot below "rade X0DQ
and both the persons who prepared and checked the B*S will si"n
the same'
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&he bids conformin" to the specications and lowest in value will
be rated in the B*S, as lowest P)1Q' Second lowest P)6Q, third
lowest P)8Q' $fter the B*S has been checked and rated the
(urchase -epartment In char"e forwards the same alon" with
bids in ori"inal to the Indentin" -epartment for the review of the
bids and makin" recommendations for (urchase'
&he review of B*S and selection of successful bidder is done
throu"h a &ender *ommittee' &he ?eneral Mana"erR?roup
Mana"er nominates a &ender *ommittee consistin" of a
representative from IndenterDs -epartment, (urchase -epartmentand
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the specications is not accepted'
6m8 Ne
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can be enlar"ed beyond the lowest four bidders in the followin"
circumstances
1Q If the work to be awarded is intended to be split and
awarded to more than one contractor'
6Q If a rin" is suspected and the ne"otiation with the initial four
lowest bidders do not yield satisfactory results'
8Q If hi"her bids are in very close proimity of the two lowest
bids and any chan"e in !uantities can chan"e the ratin" of
the bidders'
If a sin"le bid is received a"ainst the open en!uiry' &he same canbe accepted if the rates are considered reasonable' /therwise,
ne"otiations are held with the bidder and a decision taken either
to accept the sin"le bid or to resort to reLtender'
If a sin"le bid is received a"ainst a limited en!uiry normally it is
rejected and reLtenderin" resorted to' 9owever, the competent
authority, if he is satised that it would be in the interest of
/r"ani7ation, to accept the sin"le bid received' 9e may do so and
record reason in writin"'' Such bid is accepted on the
recommendations of the &ender *ommittee and concurrence of
the
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•
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Ahile placin" the repeat order, it should be ensured that there
has been no downLward trend in prices since the ori"inal order
was placed' .epeat orders shall be placed with the concurrence of
the nance department and approval of the competent authority'
&he authority competent to approve repeat orders will be the
same which approved the ori"inal order'
6H8 1o!!o3U. o, Pu+72)*e O+de+*
&he (urchase -epartment shall receive all the mail from the
vendors and shall reply to them in consultation with otherdepartments whenever necessary'
&he purchase department shall keep Indentin" -epartment
informed of the status throu"h periodicalRmonthly reports'
&he (urchase -epartment shall be responsible for followin" up of
the purchase orderRcontract with vendors and transporters until
the material is received and accepted at the plantRstores'
6+8 I*.e7tio o, M)te+i)!
&he (urchase -epartment shall *oLordinate with other
departments and arran"es inspection of materials at vendorDs
shops prior to dispatch wherever stipulated in the purchase order'
Inspection of materials in other cases shall be carried out on
receipt of materials at plant siteRstores only those materials
cleared by the inspection as conformin" to purchase order
specications will only be taken on char"e in stores' &he person
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inspectin" the material will si"n on the XStores .eceipt %oucherD
in taken of havin" inspected and accepted the material'
6*8 D)m)e7ted M)te+i)!*
&he Stores -epartment shall be responsible for sendin" suitable
intimations to the
• %endor for materials rejected if the same do not conform to
the specications mentioned in the purchase order'
• %endor and Insurance *ompany for material received short
or dama"ed'
• Ahere the delivery oKered by the vendor was eLworks the
intimation for dama"edRshort receipt of materials will be sent
only to the Insurance *ompany' &he intimation to vendor and
the Insurance company for material received short or
dama"ed or rejected should sent as early as possible after
the material is inspected but in any case not later than aweek from the date of their receipt at plantRsite' $ copy of
the intimation issued by the Store -epartment will be
endorsed to
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supplied by him' &he (urchase -epartment shall evolve a suitable
system so that suitable communication is issued to the vendor
until the replacement supply is received or !uantity short
delivered is made "ood by him'
6t8 I*u+)7e C!)im
&he $ccounts -epartment on receipt of a copy of the letter issued
by Stores -epartment make and entry in a re"ister maintained for
the purpose and shall lod"e suitable insurance claims' &he
$ccounts -epartment shall coLordinate with other departmentswherever necessary and collects the details of materials and
other costs as may be re!uired for preferrin" a claim'
6u8 C)*2 Pu+72)*e
*ash purchases or materials should be avoided as far as possible'
*ash purchases should be resorted to only meet the plantDs
emer"encies or where it would not be economical to call for
!uotations owin" to the small value of purchases'
&he ?eneral Mana"erR?roup Mana"er may, however, consider
keepin" a suitable amount as Imperest fund with the (urchase
-epartment, Maintenance -epartment and $dministration
-epartment to enable them to make cash purchase of items to
meet the ur"ent dayLtoLday needs of the plant'
6/8 B)- Gu)+)tee*
=2
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&he
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$ suitable system should be introduced by the
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P3.i
"
htQ
.i
"h
tt ime
. i"
h tBu
a li ty
. i"
h tSo
u r
ces
.i
"ht(r ice
. i"
h tBua
n ti ty
si"nicant that eFciency of any or"ani7ation is contin"ent upon
havin" the ri"ht material of ri"ht !uality or ri"ht place in the ri"ht
!uantity at the ri"ht time and place'
& R ,o+ bette+ Pu+72)*e 6M)te+i)!8 Cot+o!3
&he eistin" purchase procedure "ives fair chances of competition
to all the vendors' It leaves no room for malpractices or favoritism
of employees i'e' nobody obli"e any one out of way' It is not very
ri"id' In time of ur"ency of re!uirement, necessary deviations are
approved by competent authority so as to avoid stoppa"e of
work' &he procedure is based on democratic way of workin"'
?ood su""estions to improve eFciency are always considered'
%arious annual rate contract runnin" contracts are entered for
re"ular consumable items, like oil and lubricants, stationery,
chemicals, medicines, printin" job etc' &his is reducin" the
repetitive job times and money of company'
=8
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#ut there are shortcomin"s also, which are evaluated takin" into
consideration the ve essentials of purchase functions are as
follows
(urchase time
(urchase !uantity
(urchase !uality
(urchase price and
Source of supply
6i8Pu+72)*e time
&he purchase time indicates the leadLtime i'e' time taken to
physically receive the material from the date of its indent'
&o nd out the lead time ve cases diKerent items have been
studied randomly, and analy7ed its fact which indicates that by
followin" the eistin" procedure, the administrative lead time is
lon" = to> months Pin some cases onlyQ, while suppliers lead time
is also about normally 6 to 8 months'
6ii8 Pu+72)*e Hu)!ity )d Hu)tity
It has been observed that the !uantity of material is bein"
purchased considerin" = to 16 months consumption that means
no economic order !uantity has been ed for diKerent types of
material' -ue to the eistin" system
*ompany is incurrin" cost of carryin" Inventory interest of capital
rent etc' *ompany is also incurrin" losses due to the depreciation
in !uantity, depreciation in !uality and obsolesce of materials
durin" stora"e'
=
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*ompany is also incurrin" avoidable ependiture such as holdin"
up keep of surplus material, nancial losses due to fall in the price
of materials, etra ependiture on ecess of materials re!uired'
It is su""ested that before takin" nal decision economic order
!uantity should be determined for each item and order should be
placed accordin"ly'
&he determination of economic order !uantity techni!ues has
been discussed on succeedin" pa"es'
6ii8 Pu+72)*e P+i7e &he price of each item is bein" compared with supplierDs
!uotations considerin" the !uality of material to be supplied'
$lthou"h, purchase department should keep itself informed of the
price trends, with the help of market reports, trade papers and
journals, report by purchase a"ainst and sales representative of
the suppliers, published catalo"ue and price list'
6iii8 Sou+7e o, *u..!y
&he selection of a particular supplier is made after invitin"
tenders from possible source of supply' &here are four types of
tenders commonly used, which areL
Sin"le tender
)imited tender
/pen tender
?lobal tender
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&he tender received are opened on the date and time stipulated
and compared to select a nal vendors, considerin" !uality,
delivery after sales services etc' which indicates that ri"ht source
is selected, only thin" taken in to consideration is to maintain
cordial relations with suppliers'
B STORAGE CONTRO9
Me)i< o, Sto+e “Place for all & all are at their places”
9ere in above sentence “all” is mean as “MaterialLInventoryL
Stock”
Sto+e De.)+tmet3
In a manufacturin" unit or in any or"ani7ation, stores are
constructed accordin" to the needs of the or"ani7ation and
materials to be stored in the stores'
# Re7ei.t Se7tio
.eceipt store usually function as part of the stores and it is
manned dependin" upon si7e of the industry and compleity of
the materials to be handled'
Re7ei.t P+o7edu+e*
$ll incomin" "oods must be received in receipt section and after
makin" necessary documentation and paper work "oods should
be delivered for its custody or other destination' -urin" that
period same shall be identied and kept in separate specied
place to prevent any misplacementRpilfer"e or mi up'
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Ve+i7)tio o, u)tity
(acked materials are opened and veried with challan or bills
accompanied with the lost and the same is matched with ('/' and
also ('/ is pro"ressed simultaneously'
D)i!y Re7ei.t Re.o+t
$ report indicatin" XS.%D reference of all the individual
consi"nments on daily basis are bein" circulated to the purchase
sectionRindenterRuser for mana"ement information of its arrival
and arran"in" inspection of the same thereof'
I*.e7tio )d Di*7+e.)7y Re.o+t
In order to ensure !uality for all the incomin" material with the
help of skill, personnelDs, material is oKered for inspection' &he
normal methods used are by visual, by touch, by smell, by
comparison, by actual testin", )aboratory methods L ISI test etc'
&his is to determine the acceptability of the article received' Itemrejected in inspection and observation re"ardin" any deviation in
!uantityRcondition is recorded separately in a re"ister called
“M$&+.I$)S +T*+(&I/0 .+?IS&+.”, all this informationDs also
simultaneously sent to the purchase indenter and the supplier
throu"h a report' It is called “M$&+.I$) +T*+(&I/0 .+(/.&”' &he
custody of rejected items remains with receipt section till it is
disposed of as per the instruction of purchaser, indenter and
lookin" to its status of payment respectively' &he action for
disposal may be one out of the details as under
aQ Items to be returned to the supplierRInsurance company'
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bQ Items accepted later with some deviation and or reduction in
price with or without rectication'
cQ Item is scraped and or destroyed'
C!)im ,o+ 9o**Kd)m)
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physical checkin"' )ocation and preservation of material received
from the receipt section'
&he material preserved here is issued to the user department
throu"h SI% PStore Issue %oucherQ' 9ere M(. PMaterial (urchase
.e!uisitionQ is prepared only for stock items which are then sent
to the (urchase -epartment throu"h Stores -epartment for the
stock items M(. is made keepin" the .eLorder level while
proceedin"'
9e)d TimeIn all or"ani7ation there is a time "ap between the demands
Pindentin"Q and the fulllment i'e' supply of materials' &his nite
time interval between the cycle of indentin" and actual
procurement of material is called lead time or lead period' )eadL
time has direct impact on inventory levels' )on"er the lead times
hi"her the inventories'
S),ety Sto7-
If the leadLtime and the consumption durin" the lead time are
known with certainty' &here would be no need of providin" any
buKer stock or safety stock' In practice, however, there are
variations in both leadLtime as well as lead time consumption and
hence it is usual to provide for buKer stock' &he safety stock is
calculated based on an analysis of the variation in )eadLtime
consumption'
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Stores are like a bank which holds materials which are valuable
assets and it should, therefore, be planned properly' Its location
should be decided at the time of ori"inal plant layLout' .aw
materials, packin" materials, imported components, etc'
eclusively re!uired by the plant are to be stored in the vicinity'
4 Di*.o*)! Se7tio
&he word meanin" of disposal is, disposin" of, "ettin" rid of, sell
etc' +tc' In our daily life, we are disposin" of household "oods for
various reasons and well aware of the terminolo"y' In industry,the disposal is of mainly followin" types
• Surplus
• ScrapRwaste
Su+.!u*
Surplus is usually dened as “ecess of rmDs operational
re!uirements”' &he industrial surpluses are due to mistakes in
over procurement' Aasteful production process and ineFciency in
"eneral'
&he surpluses also result from the ineFcient use of production
machinery, carelessness and poor purchasin"' &he least costly
method of controllin" surplus is its elimination at the source' &his
is why eKective value analysis pro"rammes which eliminate
surpluses before they occur are so protable'
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Ideti7)tio*
&he identication of surplus stocks can be done by makin" a"e
and consumption analysis' &his is a simple statement showin" of stock held and issues made durin" the last few years i'e' 8 to 3
years if no issue has been made at all of the items for the past
say 8 years, it is a case nonLmovin" items' If 6222 pieces are in
stock, and in last ve years only =, 1, 82, 83 0os' 9ave been
issued it will reveal a case of surplus stockin" or slow movin"'
Such an analysis will throw up cases of slow movin" and nonL
movin" items from which surplus and obsolete stocks can be
identied Rcodied from such analysis one can also know the time
from which the material has been in stora"e'
It will also be desirable to nd out what recent chan"es which
have taken place in production or operation and what char"es are
imminent from this information it can be determined what major
items, spares are likely to become obsolete and surplus' &hese
can also be considered while reviewin" alon" with slow movin"
and nonLmovin" items'
$fter sortin" of items, nd list should be made showin" particulars
of all items to be disposed oK and nally written oK' In public
sector or"ani7ations a *ommittee consistin" of representative
each from technical, nance, stores, purchase is set up to make
nal list which is approved by chief eecutive or a senior member
of the mana"ement'
&he followin" information usually appears
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Y *ode 0umber of each item
Y -escription
Y Buantity in stock
Y Buantity to be retained
Y Buantity to be disposed oK
Y /ri"inal book value of !uantity in stock
Y .ecommended #ook value of Buantity to be retained
Y .ecommended #ook value of Buantity to be disposed oK,
amount to be
Aritten oK'
S7+).K;)*te
&his terms applies to unusable material whose value is only in
terms of its materials content, be it metal, paper or cloth' &he
scrap industry is a very bi" industry in India' Merely because all
scrap can be reLcycled to produce materials of utility and "reater
value' Aaste papers are used to produce cardboards and other
packin" paper' Steel scrap is melted and reLrolled' Aaste oil are
puried and converted to en"ine oil with ori"inal specications' It
is impossible to eliminate scrapRwaste from industry but can be
minimi7ed by intelli"ent plannin" and controls'
Ahen material has been declared surplus and reserve price ed'
Usually the followin" methods of disposal are followed
• *irculation within the company
• .eturn to suppliers
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• Sellin" to other rms
• Sellin" to dealers and bookers
• Sellin" to employees
• Sellin" by auction
• -isposal throu"h presses tender
• -isposal throu"h limited tender in!uiry'
C ;ARE0OUSE SYSTEM AND PROCEDURE
&he control of materials while in stora"e is aKected throu"h whatis known as the perpetual Inventory' &hus two main functions of
the perpetual Inventory system have been studied which are
• .eceipt and issue system
• Maintenance of store records
T2e S7o.e-
&he procedure comes in to operation immediately on receipt of
dispatched documents or dispatched intimation in the stores and
covers on the activities, i'e' clearance, delivery, inspection, stock
char"in" and preservation, issue and return of materials by the
user PIndenterQ and ends after strikin" out balance from the stock
card and delivery of documents %IC' S.%'SI%', to the account
department'
RECEIPT SYSTEM
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&he system for receipt starts even before the time when the
material actually reached the plant, when purchase order is
planned a copy is sent to the stores indicatin" !uantity and
approimate delivery date' &hese are arran"ed in chronolo"ical
order so that any time the volume of receipt can be estimated'
&his also helps in plannin" labor contracts when unloadin"
activities eceed a particular limit' &his is the rst step in the
store system'
Suppliers, once they dispatch the "oods, normally send and
advice note, dispatch note to the stores' &his provides information
on the date of dispatch, carrier details, description consi"nment
and value' &his is sent in advance so that !uick and easy
clearance may be done' /n receipt of consi"nments, the store
personnel check the consi"nment and tally the material with
supplierDs delivery note R challans alon" with relevant documents,
the material is visually checked for any apparent dama"e ordiscrepancy' $ppropriate remarks R endorsement is made
accordin"ly on the delivery notes R challans in case of
discrepancies on deviation bein" found in the suppliers received'
Material received a"ainst the delivery notes R challans will be
checked with the relevant purchase orders details mentioned in
the challans R delivery notes and packin" notes received with the
consi"nment' Store receipt voucher is prepared in seven copies
for item found in an order' &he material is than paid up for
inspection, items nally accepted is physically handed over to the
custody stores or project departments and their
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acknowled"ement obtained in the appropriate columns of the
receipt notes'
INSPECTION
In eercisin" control on the !uality of incomin" materials
inspection plays an important role' Materials purchased in India
and abroad are inspected accordin" specications, prescribed
tests, drawin"s, approved samples etc as stipulated in the
purchase order' &o inspect diKerent types of materials followin"
inspection methods are used'
I*.e7tio by t2i+d .)+ty:
Such a"encies are +I) cloyed re"ister, I#. etc' acceptance of
material is based on the certicates and reports of these
a"encies'
I*.e7tio by ideti< de.)+tmet*:
$t vendors premises durin" manufacture of materials or before
dispatch of the same the concerned oFcers of indenters carry out
such inspection'
M)te+i)!* te*t 7e+ti7)te*:
&he material may be inspected and accepted based on the
manufactures test certicates' Materials are inspected and
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accepted by carryin" out chemical, electrical or mechanical test
either of the project site or throu"h the reco"ni7ed lab as
stipulated in the purchase order' Some materials like shop, cotton,
waste, phenol etc are accepted by visual inspection' (roprietary
nature of materials are accepted by either visual inspection or
carryin" necessary tests whenever re!uired' Materials are also
accepted after ascertainin" the !uality as per samples on
stipulated in the order'
ISSUE SYSTEM:
&he issue system relates to function of issue card and Inventory
control section of stores' It covers all material stocked by the
@.I#9*/ stores and all bulk and raw materials directly stored by
the users' It be"ins with the preparation of issue voucher and
ends with their submission to accounts departments'
GENERA9 AUT0ORITY AND RESPONSIBI9ITY:
&he authority for receipt and stora"e of all the materials is
centrali7ed in the store department accepts medicines and
stationary' Issue will be made only on receipt or presentation of
authori7ed re!uisition'
Stores department is responsible to provide material Pthrou"h
stores issue voucherQ to the authori7ed re!uisition on demand, all
material declared as stock items and contained in the store
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catalo"ue as the desired and the !uantities re!uested for
immediate use by them'
UANTITY O1 ISSUE:
In respect of consumable stores and such other materials as are
re!uired frequent or at odd hours, the issue is made in lar"e
!uantities to reduce electrical work and to ensure ready
availability of materials at si"ht place when re!uired' &he !uantity
issued is for 13 days consumption' &he entire issued !uantity is
charred in full to the re!uisition cost center thou"h all of its not
actually used or consumed immediately' In case an item stocked
as a set it is issued as a set not in parts'
PERPETUA9 INVENTORY SYSTEM:
?enerally or"ani7ations have the followin" perpetual Inventorysystem, which comprises
• *arde system
• Stores led"er and
• (hysical stock verication
Because of Computerization (MIS) Cardex & Stores Ledger systems
are not used no!
CARDE= SYSTEM
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&o maintain the !uantitative records of receipt and issues and
closin" balances of items of stock a carde system is followed'
Stores department is doin" all the !uantitative accountin" of
materials'
STORES 9EDGER
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placin" orders' So that the determine Inventory level can be
maintained even of spoila"e, dama"es and obsolescence takes
place'
1INANCIA9 MANAGERS RO9E IN INVENTORY
MANAGEMENT
Inventory represents a lar"e investment by manufacturin"
concern therefore, "reat emphasis must be placed on its eFcient
mana"ement' &hou"h, the operative responsibility for Inventory
mana"ement lies with the inventory mana"er, the nancial
mana"er must also be concerned with all types of inventoriesL
raw materials, workLinLpro"ress and nished "oods' 9e must
monitor Inventory levels and see that only an optimum amount is
invested in Inventory' 9e should be familiar with the Inventory
control techni!ues and ensure that Inventory is mana"ed well'
9e should try to resolve the conGictin" view points of all the
departments in order to have eFcient inventory mana"ement' 9e
has to act as a careful inspector levels' 9e should introduce the
policies which reduce the lead time, re"ulate usa"e and thus,
minimi7e safety stock' $ll these techni!ues of Inventory
mana"ement lead to the "oal of wealth maimi7ation'
VA9UATION O1 INVENTORIES
OBJECTIVE3
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$ primary issue in accountin" for inventories is the determination
of the value at which inventories are carried in the nancial
statements until the related revenues are reco"ni7ed' &his
statement deals with the determination of such value, includin"
the ascertainment of cost of inventories and any writeLdown
thereof to net reali7able value'
1' &his statement should be applied in accountin" for inventories
other than
PrQ AorkLinLpro"ress arisin" under construction contacts,
includin" directly related service contracts'
PsQ AorkLinLpro"ress arisin" in the ordinary course of business of
service providers'
PtQ Shares, debentures and other nancial instruments held as
stockLinLtrade'
PuQ (roducerDs inventories of livestock, a"ricultural and forest
products and mineral oils, ores and "ases to the etent that
they are measured at net reali7able value in accordance with
well established practices in those industries'
6' &he inventories referred are measured at net reali7able value
at certain sta"es of production' &his occurs, for eample, when
a"ricultural crops have been harvested or mineral oils, ores and
"ases have been etracted and sale is assured under a forward
contract or a "overnment "uarantee or when a homo"enous
market eists and there is a ne"li"ible risk of failure to sell'
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&hese Inventories are ecluded from the scope of this
statement'
DE1INITIONS
&he followin" terms are used in this statement with the meanin"s
specied
Inventories are assets
PaQ 9eld for sale in the ordinary course of business'
PbQ In the process of production for such sale, or
PcQ In the form of materials or supplies to be consumed in the
production
process or in the renderin" of services'
# Inventories encompass "oods purchased and held for resale,
for eample, merchandise purchased by a retailer and held for
resale, computer software held for resale, or land and otherproperty held for resale' Inventories also encompass nished
"oods produced, or workLinLpro"ress bein" produced, by the
enterprise and include materials, maintenance supplies,
consumables and loose tools awaitin" use in the production
process' Inventories do not include machinery spares which can
be used only in connection with an item of ed asset and
whose use is epected to be irre"ular such machinery spares
are accounted for in accordance with $ccountin" Standard P$SQ
12, $ccountin" for
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?' Inventories should be valued at lower of cost net reali7able
value'
4 Co*t o, I/eto+ie*
&he cost of inventories should comprise all costs of purchase,
costs of conversion and other costs incurred in brin"in" the
inventories to their present location and condition'
$ Co*t* o, Pu+72)*e
&he costs of purchase consist of the purchase price includin"duties and taes Pother than those subse!uently recoverable by
the enterprise from the tain" authoritiesQ, frei"ht, inwards and
other ependiture directly attributable to the ac!uisition' &rade
discounts, rebates, duty drawbacks and other similar items are
deducted in determinin" the costs of purchase'
& Co*t* o, Co/e+*io
&he costs of conversion of inventories include costs directly
related to the units of production, such as direct labor' &hey also
include a systematic allocation of ed and variable production
overheads that are incurred in convertin" materials into nished
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costs of production that vary directly, or nearly with the volume of
production such as indirect materials and indirect labor'
5 &he allocation of ed production overheads for purpose of
their inclusion in the costs of conversion is on based on the
normal capacity of the production facilities' 0ormal capacity is the
production epected to be achieved on an avera"e over a number
of periods or seasons under normal circumstances, takin" into
account the loss of capacity resultin" from planned maintenance'
&he actual level of production may be used if it approimatesnormal capacity' &he amount of ed production overheads
allocated to each unit of production is not increased as a
conse!uence of low production or idle plant' Unallocated
overheads are reco"ni7ed as an epense in the period in which
they are incurred' In periods of abnormally hi"h production, the
amount of ed production overheads allocated to each unit of
production is decreased so that inventories are not measured
above cost' %ariable production overheads are assi"ned to each
unit of production on the basis of the actual use of the production
facilities'
(' $ production process may result in more than one product
bein" produced simultaneously' &his is the case, for eample,
when joint products are produced or when there is a main product
and a byL product' Ahen the costs of conversion of each product
are not separately identiable, they are allocated between the
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products on a rational and consistent basis' &he allocation may be
based, for eample, on the relative sales value of each product
either at the sta"e in the production process when the products
become separately identiable, or at the completion of
production' Most byL products as well as scrap or waste materials,
by their nature, are immaterial' Ahen this is the case, they are
often measured at net reali7able value and this value is deducted
from the cost of the main product' $s a result, the carryin"
amount of the main product is not materially diKerent from its
cost'
' /ther costs are included in the costs of inventories only to the
etent that they are incurred in brin"in" the inventories to their
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reco"ni7e them as epenses in the period in which they are
incurred' +amples of such costs are
a' $bnormal amounts of wasted materials, labor, or other
production costs'
b' Stora"e costs, unless those costs are necessary in the
production process prior to a further production sta"e'
c' $dministrative overheads that do not contribute to brin"in" the
inventories to their present location and condition, and
d' Sellin" and distribution costs'
#? &he cost of inventories of items that are not ordinarily
interchan"eable and "oods or services produced and se"re"ated
for specic projects should be assi"ned by specic identication
of their individual costs'
#4' Specic identication of cost means that specic costs are
attributed to identify items of inventory' &his is an appropriate
treatment for items that are se"re"ated for a specic project,
re"ardless of whether they have been purchased or produced'
9owever, when there are lar"e numbers of items of inventory
which are ordinarily interchan"eable, specic identication of
costs is inappropriate since, in such circumstances, an enterprise
could obtain predetermined eKects on the net prot or loss for the
period by selectin" a particular method of ascertainin" the items
that remain in inventories'
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#$ &he cost of inventories, other than those dealt with in
para"raph 11, should be assi"ned by usin" the rstLin, rstLout
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# &echni!ues for the measurement of the cost of inventories,
such as the standard cost method or the retail method, may be
used for convenience if the results approimate the actual cost'
Standard costs take into account normal levels of consu