SlideShare una empresa de Scribd logo
1 de 31
Descargar para leer sin conexión
2. B THEORETICAL BACKGROUND
Meaning and Definition of Inventory
The inventory represents an essential component for the assets of the enterprise
and the economic analysis gives them special importance because their accurate
management determines the achievement of the activity object and the financial results.
The efficient management of inventory requires ensuring an optimum level for them,
which will guarantee the normal functioning of the activity with minimum inventory
expenses and funds which are immobilized.
Every enterprise needs inventory for smooth running of its activities. It serves as a
link between production and distribution processes. There is, generally, a time lag
between the recognition of a need and its fulfillment. The greater the time – lag, the
higher will be the requirements for inventory. The unforeseen fluctuation in demand and
supply of goods also necessitate the need for inventory. It also provides a cushion for
future price fluctuation.
The inventory means aggregate of those items of tangible personal property which
(i) Are held for sale in ordinary course of business.
(ii) Are in process of production for such sales.
(iii) They are to be currently consumed in the production of goods or services to be
available for sale.
Inventories are expandable physical articles held for resale for use in
manufacturing a production or for consumption in carrying on business activity such as
merchandise, goods purchased by the business which are ready for sale. The inventory is
of the trader, who does not manufacture it.
Thus in the study of inventory the raw materials, stores and spare parts,consumables,
finished goods and work-in-process have been included as inventories. Firm also
manufactures inventory to supplies.
Supplies included office and plant cleaning materials It is therefore quite natural that
inventory which helps in maximize profit occupies the most significant place among
current assets.
DVH-IMSR Page 48
A Study on Effectiveness and Application of Inventory Control Techniques
Taking the form of tangible current assets, the inventory is found in all the production
stages and is successively transformed from raw materials in elements of unfinished
production (work-in-process), then in finished goods destined for sale.
Factors Influences the Level of each Component of Inventory
Raw Material Inventory:
1. The volume of safety stock against material shortages that interrupt production.
2. Considerations of economy in purchase.
3. The outlook for future movements in the price of materials.
4. Anticipated volume of usage and consumption.
5. The efficiency of procurement and inventory control function.
6. The operating costs of carrying the stocks.
7. The costs and availability of funds for investment in inventory.
8. Storage capacity.
9. Re-component cycle.
10. Indigenous or foreign.
11. The lead-time of supply.
12. Formalities for importing.
Work-in-process Inventory:
1. The length of the complete production process.
2. Management policies affecting length of process time.
3. Length of process in runs.
4. Action that speeds up the production process, e.g. adding second or third production
shifts.
5. Management’s skills in production scheduling and control.
6. Volume of production.
7. Sales expectations.
8. Level of sales and new orders.
9. Price level of raw materials used, wages and other items that enter production cost and
the value added in production.
10. Customer requirements.
11. Usual period of aging.
DVH-IMSR Page 49
A Study on Effectiveness and Application of Inventory Control Techniques
Finished Goods Inventory:
1. The policy of the management to gear the production to meet the firm order in hand.
2. The policy to produce for anticipated orders and stock keeping.
3. Goods required or the purpose of minimum and safety stocks.
4. Sales policies of the firm.
5. Need for maintaining stability in production.
6. Price fluctuations for the product.
7. Durability, spoilage and obsolescence.
8. Distribution system.
9. Ability to fill orders immediately.
10. Availability of raw material on seasonal basis while customer’s demand spread
throughout the year.
11. Storage capacity.
Stores and Spares Inventory:
1. Nature of the product to be manufactured and its lead-time of manufacture.
2. State of technology involved.
3. Consumption’s patterns.
4. Lead time of supply.
5. Indigenous or foreign.
6. Minimum and safety stock and ordering quantities.
7. Capacity utilization.
8. Importing formalities.
Some of the important inventory policies relates to :
1. minimum, maximum and optimum stocks;
2. safety stocks, order quantities, order levels and anticipated stocks;
3. waste, scrap spoilage and defective;
4. policies relating to alternative use;
5. policies relating to order filling;
Pricing of Raw Materials
When issues are made out of various lots purchased at varying prices, the problem arises
as to which of the receipt price should be adopted for valuing the materials requisitions.
DVH-IMSR Page 50
A Study on Effectiveness and Application of Inventory Control Techniques
1. First In First Out Method(FIFO)
2.Last In First Out Method(LIFO)
3.Highest In First Out Method(HIFO)
4.Base Stock Method
5.Simple Average Method
6.Weighted Average Method
1. First In First Out
Materials received first will be issued first. The price of the earliest consignment is taken
first and when that consignment is exhausted the price of the next consignment is adopted
and so on. This method is suitable in times of falling prices, because the material charge
to production will be high while the replacement cost of materials will be low.
FIFO method of costing is used to introduce the subject of materials costing. The FIFO
method of costing issued materials follows the principle that materials used should carry
the actual experienced cost of the specific units used. The method assumes that materials
are issued from the oldest supply in stock and
that the cost of those units when placed in stock is the cost of those same units when
issued. FIFO is one method used to determine Cost of Goods Sold for a business.
Merits of FIFO Method:
This method is suitable during the period of decreasing of prices. It
is simple to understand and easy to calculate.
A stock is valued at the current purchase price, the value of closing stock represent
current market price.
De-merits of FIFO Method:
This method is not suitable during the period of increasing prices.
If this method is adopted during increase in price this method leads to tax liability.
2. Last In First Out LIFO Method:
Materials received last will be issued first. The price of the last consignment is taken first
and when that consignment is exhausted the price of the second last consignment is
adopted and so on. In timing of rising prices this method will show a charge to
production, which is closely related to current price levels provided that the last purchase
is made recently. This method is the opposite of the FIFO method. It assumes that the
DVH-IMSR Page 51
A Study on Effectiveness and Application of Inventory Control Techniques
material which is purchase last is issued first. Hence, material issues are priced on the
basis of the cost of most recent purchases.
Merits of LIFO Method:
This method is suitable during the period of increasing of prices It
is simple to understand and easy to calculate
No under or over recovery of cost as material are issued at actual cost price.
As a stock is valued at the current purchase, the value of the closing stock represents
current market prices.
De-merits of LIFO Method:
This method is not suitable during the period of decreasing prices.
If this method is used at the time of decreasing prices, it leads to increase in the tax
liability.
This method will lead to fluctuations in cost of different jobs.
3. Weighted Average Cost Method
Under this method, material issued is priced at the weighted average cost of material in
stock:
WAC = Value of material in stock/Quantity in stock.
4. Standard Price Method
Under this method a standard price is predetermined. The price of issues predetermined
for a stated period taken into account all the factors affecting price such as anticipated
market trends, transportation charges, and normal quantity of purchase. Standard prices
are determined for each material and material requisition are priced at standards
irrespective of the actual purchase price. Any difference between the standard and actual
price results in materials price variance.
5. Current price
According to this method, material issued is priced at their replacement or realizable
price at the time of issue. So the cost at which identical material could be purchased from
the market should be ascertained and used for valuing material issues
DVH-IMSR Page 52
A Study on Effectiveness and Application of Inventory Control Techniques
Valuation of Stocks:
There are three important types of inventories carried by a manufacturing organization:
(i) Raw material inventory
(ii) Work-in-process inventory, and
(iii) Finished goods inventory.
The valuation of work-in-process and finished goods inventory depend on:
(i) The method used for pricing materials, and
(ii) The manner in which fixed manufacturing overhead costs are treated.
Since the methods for pricing materials have been discussed earlier, let us look at how
fixed manufacturing overheads costs are treated for this purposes, two systems of costing
are used:
1. Direct costing and
2. Absorption costing
Under direct costing, fixed manufacturing overheads costs are treated as period costs and
not as product costs. Put differently, they are charged directly to the income statement
and hence not reflected in the valuation of inventories.
Under absorption costing, on the other hand, fixed manufacturing overheads cost are
treated as product costs and not period costs. Hence inventory valuation reflects an
allocated share of fixed manufacturing overhead costs.
Quite naturally, the valuation of work-in-process and finished goods inventory is lower,
ceteris paribus, under direct costing and higher under absorption costing. Further, when
the inventory level increases, the reported profit under direct costing is lower that the
reported profit under absorption costing. By the same token, when the inventory level
decreases, the reported profit under direct costing is higher than what it is under
absorption costing.
Control of Inventories
Inventories consist of raw materials, stores, spares, packing materials, consumables,
works-in-progress and finished products in stock either at the factory or deposits. The
maintenance of inventory means blocking of funds and so it involves the interest and
opportunity cost to the firm. In many countries great emphasis is placed on inventory
management. Efforts are made to minimize the stock of inputs and outputs by
DVH-IMSR Page 53
A Study on Effectiveness and Application of Inventory Control Techniques
proper planning and forecasting of demand of various inputs and producing only that
much quantity which can be sold in the market.
In general, a good inventory management implies their formation at a level that will
ensure both the requirements of the production process and the demand on the market,
but will also allow the achievement of the company‟ s performance indicators. Control of
inventory, which typically represents 45% to 90% of all expenses for business, is needed
to ensure that the business has the right goods on hand to avoid stock-outs, to prevent
shrinkage (spoilage/theft), and to provide proper accounting. Many businesses have too
much of their limited resource, capital, tied up in their major asset, inventory. Worse,
they may have their capital tied up in the wrong kind of inventory. Inventory may be old,
worn out, shopworn, obsolete, or the wrong sizes or colors, or there may be an imbalance
among different product lines that reduces the customer appeal of the total operation.
THE ANALYSIS OF INVENTORY CONTROL SYSTEM
The financial management of firms pursues broad coverage regarding inventory, but in
terms of financial analysis, we consider relevant the inventory structure and its rotation.
The inventory structure allows the financial analyst to highlight the following aspects:
the oversize or sub dimensioning of inventory elements;
highlighting inactive inventory or slow-moving inventory, which generates
expenditures;
the evolution over time of inventory structure. The relevant inventory for an
enterprise is: raw materials, work-in-process and finished goods. The increase of the
share of raw materials within total inventory reflects the following aspects:
the oversize of stock supply;
the existence of inactive or slowly moving raw materials;
reducing other categories of inventory due to the shortening of the production cycle
and the speeding of distribution.
Objectives of Inventory Control
The primary objectives of inventory control are:
(i) To minimize the possibility of disruption in the production schedule of a firm for
want of raw material, stock and spares.
DVH-IMSR Page 54
A Study on Effectiveness and Application of Inventory Control Techniques
(ii) To keep down capital investment in inventories.
So it is essential to have necessary inventories. Excessive inventory is an idle resource of
a concern. The concern should always avoid this situation. The investment in inventories
should be just sufficient in the optimum level.
The major dangers of excessive inventories are:
(i) the unnecessary tie up of the firm‟ s funds and loss of profit.
(ii) excessive carrying cost, and
(iii) the risk of liquidity
The effective inventory control system should
(i) maintain sufficient stock of raw material in the period of short supply
and anticipate price changes.
(ii) ensure a continuous supply of material to production department
facilitating uninterrupted production.
(iii) minimize the carrying cost and time.
(iv) maintain sufficient stock of finished goods for smooth sales operations.
(v) ensure that materials are available for use in production and production services
as and when required.
(vi)ensure that finished goods are available for delivery to customers to fulfil orders,
smooth sales operation and efficient customer service.
(vii) minimize investment in inventories and minimize the carrying cost and time.
(viii) protect the inventory against deterioration, obsolescence and unauthorized use.
(ix) maintain sufficient stock of raw material in period of short supply and
anticipate price changes.
(x) control investment in inventories and keep it at an optimum level.
Inventory Control Features and Benefits
Following are some of the major features and benefits of the Inventory Control system
• Scope we can obtain necessary information for supporting buying and selling
operations.
DVH-IMSR Page 55
A Study on Effectiveness and Application of Inventory Control Techniques
• Stock and non stock items We can use the Inventory Tracking flag in the Item
Location file to set up items as stock in an inventory location and non stock in a
supply location.
• Bin control We can control the bins you use for receipts, issues, incoming
inspection, lots, and serial numbered items.
We can also control storage space limitations by bin and store items in multiple bins.
• Lot, sub lot, and serial number tracking The system walks us through required
detail forms to process transactions for lot and serial number tracked items.
• Multiple levels of stock-on-hand balance control
We can inquire on stock-on-hand detail for bins, lots, serial numbers, units of measure,
allocated totals, location totals, and so on
Multiple transaction types The system processes, by location, inventory receipts, issues,
transfers, in transit transfers, bin transfers, physical inventory, and adjustments.
• Multiple units of measure The system can track and order an item in different
units of measure.
• Availability control You can select the item availability calculation to include
on-order and in-transit quantities.
• Catch weights The system can control and track the quantity of an item by
weight plus one other unit of measure.
• Comment types The system lets we group item comments into user-defined
types. For example, you might define comment type S as shipping instructions.
• Multiple costing methods (standard, average, LIFO, and FIFO)
The system can manage negative stock-on-hand quantities using the average or standard
costing method.
• Inventory auditing The system ensures that all the inventory transactions created in the
system are defined correctly.
Fixation of Norms of Inventory Holdings
Either by the top management or by the materials department could set the norms for
inventories. The top management usually sets monitory limits for investment in
inventories. The materials department has to allocate this investment to the various items
DVH-IMSR Page 56
A Study on Effectiveness and Application of Inventory Control Techniques
and ensure the smooth operation of the concern. It would be worthwhile if norms of
inventories were set by the management by objectives, concept. This concept expects the
top management to set the inventory norms (limit) after consultation with the materials
department. A number of factors enter into consideration in the determination of stock
levels for individual items for the purpose of control and economy. Some of them are:
1. Lead time for deliveries.
2. The rate of consumption.
3. Requirements of funds.
4. Keeping qualities, deterioration, evaporation etc.
5. Storage cost.
6. Availability of space.
7. Price fluctuations.
8. Insurance cost.
9. Obsolescence price.
10. Seasonal consideration of price and availability.
11. EOQ (Economic Order Quantity), and
12. Government and other statuary restriction
The fixation of inventory levels is also known as the demand and supply method of
inventory control. Carrying too much or too little of the inventories is detrimental to the
company. If too little inventories are maintained, company will have to encounter
frequent stock outs and incur heavy ordering costs. Very large inventories subjects the
company to heavy inventory carrying cost in addition to unnecessary ties up of capital.
Minimum Level
The minimum level of inventories of their reorder point may be determined on the
following bases:
1 Consumption during lead-time.
2 Consumption during lead-time plus safety stock.
3 Stock out costs.
4 Customers irritation and loss of goodwill and production hold costs.
DVH-IMSR Page 57
A Study on Effectiveness and Application of Inventory Control Techniques
To continue production during Lead Time it is essential to maintain some inventories.
Lead Time has been defined as the interval between the placing of an order (with a
supplier) and the time at which the goods are available to meet the consumer needs.
Maximum Level
The upper limit beyond which the quantity of any item is not normally allowed to rise is
known as the “Maximum Level”. It is the sum total of the minimum quantity, and ECQ.
The fixation of the maximum level depends upon a number of factors, such as, the
storage space available, the nature of the material i.e. chances of deterioration and
obsolescence, capital outlay, the time necessary to obtain fresh supplies, the ECQ, the
cost of storage and government restriction.
Re-Order Level
Also known as the „ordering level‟ the reorder level is that level of stock at which a
purchase requisition is initiated by the storekeeper for replenishing the stock. This level is
set between the maximum and the minimum level in such a way that before the material
ordered for are received into the stores, there is sufficient quantity on hand to cover both
normal and abnormal circumstances. The fixation of ordering level depends upon two
important factors viz, the maximum delivery period and the maximum rate of
consumption.
Re-Order Quantity
The quantity, which is ordered when the stock of an item falls to the reorder level, is
know as the reorder quantity or the EOQ or the economic lot size.
Economy Order Quantity
The EOQ refers to the order size that will result in the lowest total of order and carrying
costs for an item of inventory. If a firm place unnecessary orders it will incur unneeded
order costs. If a firm places too few order, it must maintain large stocks of goods and will
have excessive carrying cost. By calculating an economic order quantity, the firm
identifies the number of units to order that result in the lowest total of these two costs.
DVH-IMSR Page 58
A Study on Effectiveness and Application of Inventory Control Techniques
Reorder Point
The reorder point is the level of inventory at which the firm places an order in the amount
of EOQ. If the firm places the order when the inventory reaches the reorder point, the
new goods will arrive before the firm runs out of goods to sell.
In designing reorder point subsystem, three items of information are needed as inputs to
the subsystem.
1. Usage rate- This is the rate per day at which the item is consumed in production
or sold to customers. It is expressed in units. It may be calculated by dividing
annual sales by 365 days
2. Lead time-- This is the amount of time between placing an order and receiving
goods. This information is usually provided by the purchasing department. The
time to allow for
an order to arrive may be estimated from a check of the company‟ s record and the time
taken in the past for different suppliers to fill orders.
3. Safety stock-- The minimum level of inventory may be expressed in terms of several
days‟ sales. The level can be calculated by multiplying the usage rate and time in the
number of days that the firm wants to hold as a protection against shortages.
Re-order point = (Usage rate)(Lead time + Days of safety) = (Lead Time x Consumption
rate) + Safety stock. The probabilistic approach is found to be cumbersome and
unfeasible for a multi period problem. It is proposed an order point whereby an order is
placed. When inventory reaches so many units
Re-order point S (L) +F√SR (L)
L = Lead Time
R = Average number of units per
order F = Stock out acceptance factor.
The foregoing analysis is based on certain simplifying assumption. In the real worked
some additional consideration ought to be taken into account:
(i) Anticipated scarcity of raw material
(ii) Expected price charge
(iii)Obsolescence risk
(iv)Government restriction on inventory
(v) Competitive market.
DVH-IMSR Page 59
A Study on Effectiveness and Application of Inventory Control Techniques
Inventories Control Techniques
Store / Inventory control technique is the important tool in the hands of the modern
management. It is indispensable for each and every manufacturing concern. The
following are the important techniques of store control.
ABC Analysis of Inventories
ABC analysis is always a better control system. Under this method inventory items are
classified in to three categories such as ABC basing upon its value and cost significance.
The number of items and the value of each class are expressed as percentage of the total
and categorize as under
(i) Items of high value and small in numbers termed as 'A'
(ii) Items of moderate value and moderate in number is termed as 'B'
(iii)Items of small in value and large in number is termed as 'C'
The ABC inventory control technique is based on the principle that a small portion of the
items may typically represent the bulk of money value of the total inventory used in the
production process, while a relatively large number of items may from a small part of the
money value of stores. The money value is ascertained by multiplying the quantity of
material of each item by its unit price. According to this approach to inventory control
high value items are more closely controlled than low value items. Each item of
inventory is given A, B or C denomination depending upon the amount spent for that
particular item.
“A” or the highest value items should be under the tight control and under responsibility
of the most experienced personnel, while “C” or the lowest value may be under simple
physical control.
The relative position of these items show that items of category A should be under the
maximum control, items of category B may not be given that much attention and item C
may be under a loose control.
DVH-IMSR Page 60
A Study on Effectiveness and Application of Inventory Control Techniques
Table No 2.1
Particulars A item B item C item
Control Tight Moderate Loose
Requirement Exact Exact Estimated
Check Close Some Little
Expenditure Regular Some No
Posting Industrial Individual Group/none
Safety Stock Low Medium High
After classification, the items are ranked by their value and then the cumulative
percentages of total value against the percentage of item are noted. A detailed analysis of
inventory may indicate above figure that only 10 per cent of item may account for 75 per
cent of the value, another 10 per cent of item may account for 15 per cent of the value
and remaining percentage items may account for 10 per cent of the value. The importance
of this tool lies in the fact that it directs attention to the key items.
Advantages of ABC Analysis
1. It ensures a closer and a more strict control over such items, which are having a
sizable investment in there.
2. It releases working capital, which would otherwise have been locked up for a
more profitable channel of investment.
3. It reduces inventory-carrying cost.
4. It enables the relaxation of control for the „C‟ items and thus makes it possible for a
sufficient buffer stock to be created.
5. It enables the maintenance of high inventory turnover rate.
Fixation of various stock levels: Under this method various stock levels are fixed
scientifically to avoid over stocking and under stocking of materials. Over stocking of
materials leads to unnecessary blockage of materials and investment and under stocking
of material leads to disputation in production. These are the following stock levels which
help for planning of materials.
DVH-IMSR Page 61
A Study on Effectiveness and Application of Inventory Control Techniques
Economic ordering quantity: Economic ordering quantity is that quantity of material
which are to be ordered in one time in order to minimize ordering cost, carrying cost as
well as cost of holding stock.
Perpetual inventory system: Perpetual inventory system is defined as "a system of
records maintained by the controlling department which reflects the physical movement
of stocks and their current balances."Bin card and store ledger constitute the bedrock of
perpetual inventory system. It is a method of recording store after every receipt & every
issue and their current balances to avoid closing down the firm for stock taking. To
ensure accuracy the physical verification may be made which must have to agree with the
balance of Bin Card & store ledger. If there is any discrepancy between the two, it may
be adjusted by preparing debit note and credit note.
Perpetual Inventory System of inventory control is the maintenance of inventory control
on a continuous basis. After the material are received into the stores, the storekeeper will
arrange for the storing of each item in the allotted rack, bin, shelf or other receptacles and
attach a card to each bin for the purpose of making entries there-in, relating to the
receipts, issues and balance. The bin card or the locker card, this becomes a perpetual
inventory record for each item of stores. If the stores balance is recorded on continuous
basis after every receipt and issue, the record is said to be one of perpetual inventory and
the method of recording is called the perpetual inventory system. Thus the perpetual
inventory is a method of recording store balance after every receipt and issue to facilitate
regular checking and to obviate closing down for stock locking .As a perpetual inventory
record, the bin card records the receipt, issues and the balance of every item of stores
only in physical quantities, and not in value. The advantages of a continuous stocktaking
where perpetual inventory records are maintained may thus be summarized as follows:
(i) The elaborate and costly work involved in periodic stock taking can be avoided.
(ii) The stock verification can be done without the necessity of closing down the
factory.
(iii)The preparation of interim financial statement becomes possible.
(iv)Discrepancies are easily located and corrected immediately.
(v) It ensure a reliable check on the stores.
DVH-IMSR Page 62
A Study on Effectiveness and Application of Inventory Control Techniques
(vi)It exercises a moral influence on the stores staff.
(vii) Fast and slow moving items can be distinguished and the fixation of proper
stock levels prevents not only over-stocking, but under-stocking also.
(viii) A perpetual inventory record of the nature of the bin cards enables the
storekeeper to keep an eye on the stock levels, and replenish the stock of
every item whenever the limit falls to the reorder level.
(ix)It provides reliable information to the management of the number of units, and the
value of every item of stores.
(x) It ensures secrecy of the items that are verified.
Controlling Inventory
The reasons for inventory control are:
• Helps balance the stock as to value, size, color, style, and price line in proportion
to demand or sales trends.
• Help plan the winners as well as move slow sellers
• Helps secure the best rate of stock turnover for each item.
• Helps reduce expenses and markdowns.
• Helps maintain a business reputation for always having new, fresh merchandise in
wanted sizes and colours.
Controlling inventory does not have to be an onerous or complex proposition. It is a
process and thoughtful inventory management. There are no hard and fast rules to abide
by, but some extremely useful guidelines to help your thinking about the subject. A five
step process has been designed that will help any business bring this potential problem
under control to think systematically thorough the process and allow the business to make
the most efficient use possible of the resources represented. The final decisions, of
course, must be the result of good judgment, and not the product of a mechanical set of
formulas.
STEP 1: Inventory Planning
Inventory control requires inventory planning. Inventory refers to more than the goods on
hand in the retail operation, service business, or manufacturing facility. It also represents
goods that must be in transit for arrival after the goods in the store or plant are sold or
DVH-IMSR Page 63
A Study on Effectiveness and Application of Inventory Control Techniques
used. An ideal inventory control system would arrange for the arrival of new goods at the
same moment the last item has been sold or used. The economic order quantity, or base
orders, depends upon the amount of cash (or credit) available to invest in inventories, the
number of units that qualify for a quantity discount from the manufacturer, and the
amount of time goods spend in shipment.
STEP 2: Establish order cycles
If demand can be predicted for the product or if demand can be measured on a regular
basis, regular ordering quantities can be setup that takes into consideration the most
economic relationships among the costs of preparing an order, the aggregate shipping
costs, and the economic order cost. When demand is regular, it is possible to program
regular ordering levels so that stock-outs will be avoided and costs will be minimized.
STEP 3: Balance Inventory Levels
Efficient or inefficient management of merchandise inventory by a firm is a major factor
between healthy profits and operating at a loss. There are both market-related and budget-
related issues that must be dealt with in terms of coming up with an ideal inventory
balance:
• Is the inventory correct for the market being served?
• Does the inventory have the proper turnover?
• What is the ideal inventory for a typical retailer or wholesaler in this business?
To answer the last question first, the ideal inventory is the inventory that does not lose
profitable sales and can still justify the investment in each part of its whole.
Customer will be especially irritated if the item out of stock is one they would normally
expect to find from such a supplier. Repeated experiences of this type will motivate
customers to become regular customers of competitors.
STEP 4: Review Stocks
Items sitting on the shelf as obsolete inventory are simply dead capital. Keeping
inventory up to date and devoid of obsolete merchandise is another critical aspect of good
inventory control. This is particularly important with style merchandise, but it is
important with any merchandise that is turning at a lower rate than the average stock
DVH-IMSR Page 64
A Study on Effectiveness and Application of Inventory Control Techniques
turns for that particular business. One of the important principles newer sellers frequently
find difficult is the need to mark down merchandise that is not moving well.
STEP 5: Follow-up and Control
Periodic reviews of the inventory to detect slow-moving or obsolete stock and to identify
fast sellers are essential for proper inventory management. Taking regular and periodic
inventories must be more than just totaling the costs. Any clerk can do the work of
recording an inventory. However, it is the responsibility of key management to study the
figures and review the items themselves in order to make correct decisions about the
disposal, replacement, or discontinuance of different segments of the inventory base.
Caution and periodic review of reorder points and quantities are a must. Individual
market size of some products can change suddenly and corrections should be made.
COMMON CHARACTERISTICS OF INVENTORIES
Inventories share the following characteristics:
Inventory represent a financial investment for the company
Inventories become part of the cost of goods sold and are therefore a business expenses.
The availability of the right item at the right time is necessary for operating any
production process or satisfies a demand by a customer for a finished product.
Economic Order Quantity
One of the major inventory management problem to be resolved is how much inventory
should be added when inventory is replenished .If the firm is buying raw materials, it has
to decide lots in which it has to be purchased on each replenishment. If the firm is
planning a production run, the issue is how much production to schedule. These problems
are called order quantity problems. The task of the firm is to determine economic order
quantity. The economic order quantity is that inventory level which
minimizes the costs.
DVH-IMSR Page 65
A Study on Effectiveness and Application of Inventory Control Techniques
Determine economic inventory level involves two types of costs.
a) Ordering costs
The term ordering costs includes the entire costs of acquiring raw materials. They include
cost incurred in the following activities : requisitioning purchase ordering, transporting,
receiving, inspecting and ordering cost increases in proportion to the number of orders
placed except clerical and staff costs on a pro –data basis. Ordering costs increases with
the number of orders : thus the more frequently inventory is acquired ,the higher the firms
ordering costs. On the other hand if the firm maintains the inventory levels, there will be
few orders placed and ordering costs will be relatively small. Thus ordering costs
decreases with increasing size of inventory.
b) Carrying costs :
Costs incurred for maintaining a given level of inventory called carrying costs.They
include storage, insurance, taxes, deterioration and obsolescence. The storage costs
comprise cost of storing space, stores handling costs of clerical and staff service costs
incurred in recording and providing facilities. Carrying costs vary with inventory size. It
is contrary to that of ordering costs which decline with increase in inventory size .The
economic size of inventory would thus depend on trade off between carrying costs and
ordering costs.
Assumptions of the EOQ Model:
The basic EOQ model is based on the following assumptions:
1. The forecast usage / demand for a given period; usually one year, is known.
2. The usage / demand is even throughout the period.
3. Inventory orders can be replenished immediately (there is no delay in placing and
receiving orders).
4. There are two distinguishable cost associated with inventories: costs of ordering
and costs of carrying.
5. The cost per order is constant regardless of the size of order.
6. The cost of carrying is a fixed percentage of the average value of inventory.
EOQ Formula:
For determining the EOQ formula we shall use the following symbols:
U = annual usage / demand
DVH-IMSR Page 66
A Study on Effectiveness and Application of Inventory Control Techniques
Q = quantity ordered
F = Cost per order
C = per cent carrying
cost P = price per unit
TC = total costs of ordering and carrying.
Given the above assumptions and symbols, the total cost of ordering and carrying
inventories are equal to
TC = U * F + Q * P * C
Q 2
Benefits of Holding Inventory
Holding of inventories results in a following benefits.
Quick Services:
A customer desires a prompt fulfillment of orders. A firm will have to make the goods
available for sale. In the event of its not being able to offer quick service to customers,
the latter are likely to get their orders executed by competitors.
Reduction in Order Costs
Each order increases certain costs. If the number of orders is reduced, it is possible to
economize on these costs or the procedure involving each other need not be repeated each
time.
Discounts:
A firm is in position to take advantage of trade discounts by placing bulk order with
suppliers. A proper proportion will have to be maintained between the costs of
maintaining inventories and the discount that is likely to be gained.
Effects of holding high stock
Increased storage costs.
Increased risk of obsolescence.
Increased capital investment, which reduces the capital available for other activities and
projects.
DVH-IMSR Page 67
A Study on Effectiveness and Application of Inventory Control Techniques
Cost of holding inventories
Inventories tie up funds. They also expose a firm to a number of risks and costs. The
different costs are material cost, cost of ordering, holding or carrying the inventory, under
stocking costs and over-stocking costs.
Material Cost:
This is the cost of purchasing goods plus the transportation and handling charges.
Order Cost:
This is a variable cost of placing an order for goods. The cost of ordering also includes
the following costs:
Stationery, typing and dispatch of orders and reminders.
Rent and depreciation on the space and equipment utilized by the concerned
purchasing personnel.
Insurance expenditure incurred to protect goods against fire and other risks etc.
Cost of Carrying Inventories
The components of these costs are:
The cost of capital that is the cost of the money invested in the
inventory. The salaries and statutory payment of stores personnel.
Cost of tying of funds:
When funds are invested in the inventory, it is obvious that they are not available for any
other use.
Cost of under stocking:
Excess inventories represent additional and unnecessary cost. Under stocking or out-of-
stock cost is due to the non-stocking of an inventory.
Cost of overstocking:
It is basically opportunity cost arising out of the investment in inventory for a longer
period than necessary.
DVH-IMSR Page 68
A Study on Effectiveness and Application of Inventory Control Techniques
3 RESEARCH DESIGN
Inventory
Inventory in general means “stock of goods”. It covers the stock of raw materials,
components, spare parts; work in process or semi-finished goods and finished goods.
Inventories constitute the most significant part of current asset of a large majority in
India. On the average, inventories are approximately 60% of the current asset in public
companies in India. Because of the large size of inventories maintained by firms, a
considerable amount of fund is required to be committed in them. Inventory can be
reviewed as idle resources of any kind having an economic value. They are those goods
which are procured, stored and used for the day to day functioning of an organization.
The term inventory includes materials-raw, in process, finished packaging, spares and
others stocked in order to meet an unexpected demand or distribution in the future.
Inventory can be used to refer to the stock on hand at a particular time of raw materials,
goods-in-process of manufacture, finished products, merchandise purchased for resale,
and the like, tangible assets which can be seen, measured and counted. In connection with
financial statements and accounting records, the reference may be the amount assigned to
the stock of goods owned by an enterprise at a particular time.
COMMON CHARACTERISTICS OF INVENTORIES
Inventories share the following characteristics:
Inventory represent a financial investment for the company
Inventories become part of the cost of goods sold and are therefore a business expenses.
The availability of the right item at the right time is necessary for operating any
production process or satisfies a demand by a customer for a finished product.
DVH-IMSR Page 69
A Study on Effectiveness and Application of Inventory Control Techniques
OBJECTIVE OF INVENTORY CONTROL SYSTEM:
In the context of inventory, the firm is faced with the problem of meeting two conflicting
needs:
To maintain a large size of inventory for efficient and smooth production and
operations.
To maintain a minimum investment in inventories to maximize profitability.
Both excessive and inadequate inventories are not desirable. These are two danger points
within which the firm should operate. The objective of inventory management should be
to determine and maintain optimum level of inventory investment. The optimum level of
inventory will lie between two danger points of excessive and inadequate inventories.
The firm should always avoid a situation of over investment or under-investment in
inventories. The major dangers of over investment are:
a) Unnecessary tie-up of the firm‟ s funds and loss of profit
b) Excessive carrying costs, and
c) Risk of liquidity.
The excessive level of inventories consumes funds of the firm, which cannot be used for
any other purpose, and thus, it involves an opportunity cost. The carrying costs, such as
the cost of storage, handling, insurance, recording and inspection, also increase in
proportion to the volume of inventory. These costs will impair the firm‟ s profitability
further. Excessive inventories carried for long-period increase chances of loss of
liquidity. It may not be possible to sell inventories in time and at full value. Raw
materials are generally difficult to sell as the holding period increases. There are
exceptional circumstances where it may pay to the company to hold stocks of raw
materials. This is possible under conditions of inflation and scarcity. Work in process is
far more difficult to sell. Similarly, difficulties may be faced to dispose of finished goods
inventories as time lengthens. The downward shifts in market and the seasonal factors
may cause finished goods to be sold at low prices. Another danger of carrying excessive
inventory is the physical deterioration of inventories while in storage. In case of certain
goods or raw materials deterioration occurs with the passage of time, or it may be due to
mishandling and improper storage facilities. These factors are within the control of
management, unnecessary investment in inventories can thus, be cut down.
DVH-IMSR Page 70
A Study on Effectiveness and Application of Inventory Control Techniques
Maintaining an inadequate level of inventories is also dangerous. The consequences of
underinvestment in inventories are:
a) Production hold-ups and
b) Failure to meet delivery commitments
Inadequate raw materials and work in process inventories will result in frequent
production interruptions. Similarly, if finished goods inventories are not sufficient to
meet the demands of customer regularly, customers may shift to competitors, which will
amount to a permanent loss to the firm.
The aim of inventory management, thus, should be to avoid excessive and inadequate
levels of inventories and to maintain sufficient inventory for the smooth production and
sales operations. Efforts should be made to place an order at the right time with the right
source of acquire the right quantity at the right price and quality. An effective inventory
management should:
Ensure a continuous supply of raw materials to facilitate uninterrupted production.
Maintain sufficient stocks of raw materials in periods of short supply and anticipate
price changes.
Maintain sufficient finished goods inventory for smooth sales operation and efficient
customer service.
Minimise the carrying cost and time.
Control investment in inventories and keep it at an optimum level.
To maintain adequate accountability of inventory assets.
To facilitate purchasing economies. To
contribute to profitability.
OBJECTIVES OF THE STUDY:
1. To known the procedure /methods used in maintaining inventory levels and
provide accurate information about inventory management.
2. To known the inventory control techniques.
3. To achieve the use of ratio analysis as a tool for measuring the effectiveness of
inventory control system.
DVH-IMSR Page 71
A Study on Effectiveness and Application of Inventory Control Techniques
OPERATIONAL DEFINATION OF THE CONCEPTS
Inventory:
Inventory is used to designate the aggregate of those items of tangible property which are
held for sale in the ordinary course of business and goods which are in process of
production for such sale and also goods currently consumed in the production of goods or
services. Thus inventory means stock of items kept in reserve for certain period of time.
It includes raw materials, work in progress, semi finished goods, finished goods and spare
parts for the maintenance of equipment.
Current Assets:
Current assets are all those assets which change their form and substance and which are
ultimately converted into cash during the normal operating cycle of business i.e. 12
months. In short all those assets which are changed into cash within a year are called
current assets.
Current liabilities:
Current liabilities refer to all short term obligations or liabilities which are required to be
repaid within a period of one year out of short term or current assets. They include bills
payable, sundry creditors‟ bank overdraft etc.
Sales:
Cost of Goods Sold: Refers to opening stock of finished goods+ Purchase of finished
goods + direct expenses- closing stock of finished goods.
PURPOSE OF THE STUDY
The inventory control helps in providing information to efficiently managing the flow of
materials, effectively utilize people and equipment, coordinate internal activities, and
communicate with customers. Thus this study provides the information which helps in
making more accurate and timely decisions to manage operations in the organization.
SCOPE OF THE STUDY:
The scope of the study is-
1. Present practices being followed at HIDP.
2. Management performances in controlling the inventory.
DVH-IMSR Page 72
A Study on Effectiveness and Application of Inventory Control Techniques
LIMITATION OF THE STUDY
The project has some of the limitation are as follows:-
1) Some data which are given may not be up to date.
2) More emphasis is given to the secondary data.
3) There were some people who did not respond and much information was
not obtained. So it was not possible to go in depth.
4) The finance information is not given in depth, may be because of security.
5) As market is fast changing and hence accurate calculation of value of stock
is practically not possible
TOOLS AND TECHNIQUES FOR COLLECTION OF DATA
The research design for the study was assessed and collected by the particular
information provided by the company regarding all types of stocks or inventories. The
following tools and techniques were used for collecting the data:
A. For collecting primary data
Information provided by company executives and managers.
B. For collecting secondary data
Company websites
Company handbook
Previous records
METHODOLOGY
Research methodology represents the strategies involves in collecting and analyzing
data collected, in order to have meaningful interpretations of the research findings. This
section attempts to give an insight into the way and manner in which this research was
carried out. This includes the mode of data collection, how these data were analyzed and
the research design.
Methods of Data Collection
Essential information for this research work were collected through primary
and secondary sources the combinations include:
(i) Interview with some key personnel in the stores, purchasing, production and inventory
DVH-IMSR Page 73
A Study on Effectiveness and Application of Inventory Control Techniques
departments of the company.
(ii)Observation of the production process was done to see the flow of goods in the
conversion process. Materials handling and storage were also observed and so was
the patrol /inspection procedures.
(iii) Record analysis of relevant data was obtained from the company‟ s annual report
and
journals.
(iv)Theoretical background information was gathered through review of related
literature on inventory management.
Financial analysts have sounded enough warning on the danger expose to the long run
profitability as well as continuity of business concern when its inventories are left
unmanaged. First, a company, which neglects it management of inventory, runs the risk
of production bottlenecks and subsequently unable to maintain the minimum investment
it requires to maximized profit. Second, inventories that are inefficiently managed may
apart from affecting sales create an irreparable loss in market for companies operating in
highly competitive industry. Invariably, a company must neither keep excess inventories
to avoid an unnecessary tying down of funds as well as loss in fund due to pilferage,
spoilage and obsolescence nor maintain too low inventories so as to meet production and
sales demand as at when needed. Therefore, the mere fact that ineffective inventory
management affects virtually the organizational objectives necessitates this type of
research work.
The analysis of the inventory was made using ratios; ABC analysis and inference were
drawn. Graphs are shown to pictorial depict the data.
Findings are summarized and suggestions were made based on data.
Type of research was-descriptive research aimed at identifying some of the key
problem areas in the field of inventory management.
Data source was –primary as well as secondary data source (last 4 years data on
inventory).
Data collection tool used was-website and company‟ s internal data.
DVH-IMSR Page 74
A Study on Effectiveness and Application of Inventory Control Techniques
METHODS OF ANALYSIS
Measure of Effectiveness of Inventory Control
1. Size of Inventory = Total inventory/Total Current assets
2. Size of Raw material Inventory = Raw material inventory/Total inventory
3. Size of Work in Process Inventory = Work in process Inventory/Total Inventory
4. Size of Stores and Spares parts Inventory = Stores and Spares parts
inventory/Total Inventory
5. Size of Finished Goods Inventory = Finished goods inventory/Total inventory
6. Overall inventory turnover ratio = Cost of goods sold/average total inventories at cost
7. Raw material inventory turnover ratio = Annual consumption of Raw material /
Average Raw material inventory
8. Work-in-process inventory turnover ratio = Cost of manufacture/average work-in-
process inventory at cost
9. Finished Goods inventory turnover ratio = Cost of goods sold / Average finished stock
10. Stores and spare parts inventory turnover ratio = Stores and Spares
consumed/Average stock of stores and spares
11. Age of Finished Goods inventory = 365/Finished Goods inventory turnover ratio
12. Average age of raw material inventory = 365/Raw material inventory turnover ratio
13. Average age of Work-in-Process inventory = 365/Work-in-Process inventory
turnover ratio
14. Age of Stores and spare parts inventory = 365/Stores and spare parts inventory
turnover ratio
15. Inventory holding period = 365/Inventory turnover ratio
DVH-IMSR Page 75
A Study on Effectiveness and Application of Inventory Control Techniques
FINANCIAL RATIOS
Ratio analysis has a wider application as a measure of inventory control among most
manufacturing firms. Some of the important ratios are explained below:
(1) Inventory to Sales (Total Inventory/Sales for the Period)
The ratio explains variations in the level of investment. An increase in inventory levels,
substantially beyond that which might be expected from an increase in sales, may reflect
such phenomena as the result of a conscious policy shift to higher stock levels, of
unintended accumulation of unsold stocks, and of inventory speculation, or simply
stocking in anticipation of an almost certain surge of orders.
(2) Inventory Turnover (Cost of Goods Sold/Average Inventory)
The ratio tells us the rapidity with which the inventory is turned over into receivables
through sales. Generally, the higher the inventory turnover, the more efficient the
management of a firm is. However, a relatively high inventory turnover ratio may be the
result of too low a level of inventory and frequent stock outs. Therefore, the ratio must be
judged in relation to the past and expected future ratios of the firm and in relations of
similar firms or the industry average or both.
(3) Sales to Inventory (Annual Net Sales/Inventory at the End of Fiscal Period)
The ratio indicates the volume of sales in relation to the amount of capital invested in
inventories. When inventory for a firm is larger in relation to sales (the condition which
causes it to have a lower net sales to inventory ratio than other firms) the firm‟ s rate of
return is less since it has more working capital tied up in inventories than has the firm
with a higher ratio.
(4) Inventory to Current Assets (Total Inventory/Total Current Assets)
The ratio indicates the amount of investment in inventory per rupee of current assets
investment. Generally an increasing proportion of inventory is indicative of inefficient
inventory management. The ratio may also indicate the state of liquidity position of
concern. The lower the inventory to current assets lowers the liquidity as compared to
other current assets, viz., receivables, cash and marketable securities.
(5) Inventories Expressed in Terms of Number of Days Sales (Inventory/Sales x 365)
The ratio indicates the size of inventory in terms of number of day‟ s sales. For this
purpose first the sales per day are calculated and inventory is divided by the amount of
DVH-IMSR Page 76
A Study on Effectiveness and Application of Inventory Control Techniques
sales per day. The increasing inventory in terms of number of day‟ s sales may indicate either
accumulation of inventory or decline in sales. Inventory for this purpose is assumed to
include finished goods only. While the former situation signifies poor inventory management,
the later indicates the poor performance of the marketing department.
(6) Sundry Creditors to Inventory (Sundry Creditors/Inventory)
The ratio reveals the extent to which inventories are procured through credit purchases.
Inventories for this purpose are assumed to include raw materials and stores and spares only.
If the ratio is less than unity, it reveals that the credit available is lower than the total
inventory required. It also explains the extent of inventory procured through cash purchases.
Indirectly it emphasizes the inventory financing policy of the firm. If the ratio is more than
one, it explains that the entire inventory is purchased on credit.
(7) Inventory to Net Working Capital (Inventory/Net Working Capital)
The ratio explains the amount of inventory per rupee of equity/long-term financed portion of
current assets. A higher ratio may mean greater amount of net working capital investment in
inventory. In order to control each category of inventory, the following ratios can be
calculated. The inventory represents an essential component for the assets of the enterprise
and the economic analysis gives them special importance because their accurate management
determines the achievement of the activity object and the financial results. The efficient
management of inventory requires ensuring an optimum level for them, which will guarantee
the normal functioning of the activity with minimum inventory expenses and funds which are
immobilized. The paper presents an analysis model for inventory management based on their
rotation speed and the correlation with the sales volume illustrated in an adequate study. The
highlighting of the influence factors on the efficient inventory management ensures the useful
information needed to justify managerial decisions, which will lead to a balanced financial
position and to increased company performance.

Más contenido relacionado

La actualidad más candente

Materials cost accounting
Materials cost accountingMaterials cost accounting
Materials cost accountingAchal Singhal
 
Quantitative easing advantages_disadvantages
Quantitative easing advantages_disadvantagesQuantitative easing advantages_disadvantages
Quantitative easing advantages_disadvantagestutor2u
 
Acquisition and Disposition of Property, Plant, and Equipment
Acquisition and  Disposition of Property,  Plant, and EquipmentAcquisition and  Disposition of Property,  Plant, and Equipment
Acquisition and Disposition of Property, Plant, and Equipmentreskino1
 
3 inventory -part1
3 inventory -part13 inventory -part1
3 inventory -part1kim rae KI
 
Elements of cost
Elements of costElements of cost
Elements of costUday Teke
 
Conflicts between Macro-Objectives
Conflicts between Macro-ObjectivesConflicts between Macro-Objectives
Conflicts between Macro-Objectivesmattbentley34
 
Process Costing
Process CostingProcess Costing
Process Costingusmanuddin
 
2.1. Balance Of Payment Current Account
2.1. Balance Of Payment Current Account2.1. Balance Of Payment Current Account
2.1. Balance Of Payment Current AccountHai Vu
 
Foreign exchange exposure & risk mannagement1
Foreign exchange exposure & risk mannagement1Foreign exchange exposure & risk mannagement1
Foreign exchange exposure & risk mannagement1amit1002001
 
Money measuring
Money measuring Money measuring
Money measuring Jawad Ahmed
 
Foreign exchange rate and its determination by Ms. Anita Babbar
Foreign exchange rate and its determination by Ms. Anita BabbarForeign exchange rate and its determination by Ms. Anita Babbar
Foreign exchange rate and its determination by Ms. Anita Babbarkulachihansraj
 
MODULE 4 Managerial Economics.pptx
MODULE 4 Managerial Economics.pptxMODULE 4 Managerial Economics.pptx
MODULE 4 Managerial Economics.pptxssuserff5cd7
 
Process costing ppt
Process costing pptProcess costing ppt
Process costing pptNeeruJaswal2
 
Material cost and control
Material cost and controlMaterial cost and control
Material cost and controlBELLARMINDIANA
 

La actualidad más candente (20)

Material accounting part 1
Material accounting part 1Material accounting part 1
Material accounting part 1
 
Materials cost accounting
Materials cost accountingMaterials cost accounting
Materials cost accounting
 
Quantitative easing advantages_disadvantages
Quantitative easing advantages_disadvantagesQuantitative easing advantages_disadvantages
Quantitative easing advantages_disadvantages
 
Acquisition and Disposition of Property, Plant, and Equipment
Acquisition and  Disposition of Property,  Plant, and EquipmentAcquisition and  Disposition of Property,  Plant, and Equipment
Acquisition and Disposition of Property, Plant, and Equipment
 
3 inventory -part1
3 inventory -part13 inventory -part1
3 inventory -part1
 
Acca f2
Acca f2Acca f2
Acca f2
 
Elements of cost
Elements of costElements of cost
Elements of cost
 
Conflicts between Macro-Objectives
Conflicts between Macro-ObjectivesConflicts between Macro-Objectives
Conflicts between Macro-Objectives
 
Process Costing
Process CostingProcess Costing
Process Costing
 
National income
National incomeNational income
National income
 
2.1. Balance Of Payment Current Account
2.1. Balance Of Payment Current Account2.1. Balance Of Payment Current Account
2.1. Balance Of Payment Current Account
 
Chapter 8
Chapter 8Chapter 8
Chapter 8
 
Cost analysis
Cost analysis Cost analysis
Cost analysis
 
Foreign exchange exposure & risk mannagement1
Foreign exchange exposure & risk mannagement1Foreign exchange exposure & risk mannagement1
Foreign exchange exposure & risk mannagement1
 
Money measuring
Money measuring Money measuring
Money measuring
 
Foreign exchange rate and its determination by Ms. Anita Babbar
Foreign exchange rate and its determination by Ms. Anita BabbarForeign exchange rate and its determination by Ms. Anita Babbar
Foreign exchange rate and its determination by Ms. Anita Babbar
 
MODULE 4 Managerial Economics.pptx
MODULE 4 Managerial Economics.pptxMODULE 4 Managerial Economics.pptx
MODULE 4 Managerial Economics.pptx
 
Exchange rates
Exchange ratesExchange rates
Exchange rates
 
Process costing ppt
Process costing pptProcess costing ppt
Process costing ppt
 
Material cost and control
Material cost and controlMaterial cost and control
Material cost and control
 

Destacado

Taller cableado estruturado final
Taller cableado estruturado finalTaller cableado estruturado final
Taller cableado estruturado finalKlaudita Toloza
 
Loyola apraxia infantil
Loyola apraxia infantilLoyola apraxia infantil
Loyola apraxia infantilJeannette Lugo
 
IUPUI Life-Health Sciences Internships: Educating, Engaging, and Enlightening...
IUPUI Life-Health Sciences Internships: Educating, Engaging, and Enlightening...IUPUI Life-Health Sciences Internships: Educating, Engaging, and Enlightening...
IUPUI Life-Health Sciences Internships: Educating, Engaging, and Enlightening...icice
 
SMX West 2012 - Google Webmaster Tools
SMX West 2012 - Google Webmaster ToolsSMX West 2012 - Google Webmaster Tools
SMX West 2012 - Google Webmaster ToolsNeil Walker
 
Inventory management
Inventory management Inventory management
Inventory management Rahul Sunda
 
Tipos De Registros DNS CBTis 212
Tipos De Registros DNS CBTis 212Tipos De Registros DNS CBTis 212
Tipos De Registros DNS CBTis 212Carlos Pérez
 
Reuters: Pictures of the Year 2016 (Part 2)
Reuters: Pictures of the Year 2016 (Part 2)Reuters: Pictures of the Year 2016 (Part 2)
Reuters: Pictures of the Year 2016 (Part 2)maditabalnco
 
The impact of innovation on travel and tourism industries (World Travel Marke...
The impact of innovation on travel and tourism industries (World Travel Marke...The impact of innovation on travel and tourism industries (World Travel Marke...
The impact of innovation on travel and tourism industries (World Travel Marke...Brian Solis
 
The Outcome Economy
The Outcome EconomyThe Outcome Economy
The Outcome EconomyHelge Tennø
 
The Six Highest Performing B2B Blog Post Formats
The Six Highest Performing B2B Blog Post FormatsThe Six Highest Performing B2B Blog Post Formats
The Six Highest Performing B2B Blog Post FormatsBarry Feldman
 

Destacado (16)

Taller cableado estruturado final
Taller cableado estruturado finalTaller cableado estruturado final
Taller cableado estruturado final
 
Polifluentials Report
Polifluentials ReportPolifluentials Report
Polifluentials Report
 
Act4
Act4Act4
Act4
 
Loyola apraxia infantil
Loyola apraxia infantilLoyola apraxia infantil
Loyola apraxia infantil
 
Articulo4 11-1
Articulo4 11-1Articulo4 11-1
Articulo4 11-1
 
Ppt
PptPpt
Ppt
 
IUPUI Life-Health Sciences Internships: Educating, Engaging, and Enlightening...
IUPUI Life-Health Sciences Internships: Educating, Engaging, and Enlightening...IUPUI Life-Health Sciences Internships: Educating, Engaging, and Enlightening...
IUPUI Life-Health Sciences Internships: Educating, Engaging, and Enlightening...
 
SMX West 2012 - Google Webmaster Tools
SMX West 2012 - Google Webmaster ToolsSMX West 2012 - Google Webmaster Tools
SMX West 2012 - Google Webmaster Tools
 
Inventory management
Inventory management Inventory management
Inventory management
 
Tipos De Registros DNS CBTis 212
Tipos De Registros DNS CBTis 212Tipos De Registros DNS CBTis 212
Tipos De Registros DNS CBTis 212
 
Apraxia 3ºfono
Apraxia 3ºfonoApraxia 3ºfono
Apraxia 3ºfono
 
Verb tense
Verb tenseVerb tense
Verb tense
 
Reuters: Pictures of the Year 2016 (Part 2)
Reuters: Pictures of the Year 2016 (Part 2)Reuters: Pictures of the Year 2016 (Part 2)
Reuters: Pictures of the Year 2016 (Part 2)
 
The impact of innovation on travel and tourism industries (World Travel Marke...
The impact of innovation on travel and tourism industries (World Travel Marke...The impact of innovation on travel and tourism industries (World Travel Marke...
The impact of innovation on travel and tourism industries (World Travel Marke...
 
The Outcome Economy
The Outcome EconomyThe Outcome Economy
The Outcome Economy
 
The Six Highest Performing B2B Blog Post Formats
The Six Highest Performing B2B Blog Post FormatsThe Six Highest Performing B2B Blog Post Formats
The Six Highest Performing B2B Blog Post Formats
 

Similar a Tb

Inventory management
Inventory managementInventory management
Inventory managementKARTHIKA K.J
 
Industrial management 5 7 8 units [pls visit our blog sres11meches.blogspot.in]
Industrial management 5 7 8  units [pls visit our blog sres11meches.blogspot.in]Industrial management 5 7 8  units [pls visit our blog sres11meches.blogspot.in]
Industrial management 5 7 8 units [pls visit our blog sres11meches.blogspot.in]Sres IImeches
 
Inventory management m.com 2 sem
Inventory management m.com 2 semInventory management m.com 2 sem
Inventory management m.com 2 sempraveenep77
 
Inventory Management
Inventory ManagementInventory Management
Inventory ManagementImran Nawaz
 
Material control
Material controlMaterial control
Material controlram dubey
 
Inventory pricing & valuation
Inventory pricing & valuationInventory pricing & valuation
Inventory pricing & valuationKalpana Udhaya
 
Inventory Management.docx
Inventory Management.docxInventory Management.docx
Inventory Management.docxJosvinJoshy
 
Material control part 2 (1)
Material control part 2 (1)Material control part 2 (1)
Material control part 2 (1)BarkkhaMakhija
 
Inventory Control Models.pptx
Inventory Control Models.pptxInventory Control Models.pptx
Inventory Control Models.pptxNadirRind1
 
Inventory Management and Control, Production Planning and Control
Inventory Management and Control, Production Planning and ControlInventory Management and Control, Production Planning and Control
Inventory Management and Control, Production Planning and ControlSimranDhiman12
 
Inventory management rqm, eoq, im
Inventory management rqm, eoq, imInventory management rqm, eoq, im
Inventory management rqm, eoq, imchiranjibi68
 
Material Cost and Labour Cost PPT - Dr.J.Mexon
Material Cost and Labour Cost PPT - Dr.J.MexonMaterial Cost and Labour Cost PPT - Dr.J.Mexon
Material Cost and Labour Cost PPT - Dr.J.MexonDr. J.Mexon Fernando
 
Inventory Management Project
Inventory Management ProjectInventory Management Project
Inventory Management ProjectMOHD ARISH
 

Similar a Tb (20)

Inventory management
Inventory managementInventory management
Inventory management
 
Industrial management 5 7 8 units [pls visit our blog sres11meches.blogspot.in]
Industrial management 5 7 8  units [pls visit our blog sres11meches.blogspot.in]Industrial management 5 7 8  units [pls visit our blog sres11meches.blogspot.in]
Industrial management 5 7 8 units [pls visit our blog sres11meches.blogspot.in]
 
Inventory management m.com 2 sem
Inventory management m.com 2 semInventory management m.com 2 sem
Inventory management m.com 2 sem
 
Inventory Management
Inventory ManagementInventory Management
Inventory Management
 
inventory management.pptx
inventory management.pptxinventory management.pptx
inventory management.pptx
 
Unit iii 8 feb
Unit iii 8 febUnit iii 8 feb
Unit iii 8 feb
 
Material control
Material controlMaterial control
Material control
 
Inventories.pptx
Inventories.pptxInventories.pptx
Inventories.pptx
 
Material Management in Hospital
Material Management in HospitalMaterial Management in Hospital
Material Management in Hospital
 
Inventory pricing & valuation
Inventory pricing & valuationInventory pricing & valuation
Inventory pricing & valuation
 
Inventory Management.docx
Inventory Management.docxInventory Management.docx
Inventory Management.docx
 
Material control part 2 (1)
Material control part 2 (1)Material control part 2 (1)
Material control part 2 (1)
 
Inventory Control Models.pptx
Inventory Control Models.pptxInventory Control Models.pptx
Inventory Control Models.pptx
 
Inventory Management and Control, Production Planning and Control
Inventory Management and Control, Production Planning and ControlInventory Management and Control, Production Planning and Control
Inventory Management and Control, Production Planning and Control
 
Inventory control
Inventory controlInventory control
Inventory control
 
Inventory Control
Inventory ControlInventory Control
Inventory Control
 
Inventory management rqm, eoq, im
Inventory management rqm, eoq, imInventory management rqm, eoq, im
Inventory management rqm, eoq, im
 
Material Cost and Labour Cost PPT - Dr.J.Mexon
Material Cost and Labour Cost PPT - Dr.J.MexonMaterial Cost and Labour Cost PPT - Dr.J.Mexon
Material Cost and Labour Cost PPT - Dr.J.Mexon
 
Pom unit 3
Pom unit 3Pom unit 3
Pom unit 3
 
Inventory Management Project
Inventory Management ProjectInventory Management Project
Inventory Management Project
 

Último

Mihir Menda - Member of Supervisory Board at RMZ
Mihir Menda - Member of Supervisory Board at RMZMihir Menda - Member of Supervisory Board at RMZ
Mihir Menda - Member of Supervisory Board at RMZKanakChauhan5
 
Boat Trailers Market PPT: Growth, Outlook, Demand, Keyplayer Analysis and Opp...
Boat Trailers Market PPT: Growth, Outlook, Demand, Keyplayer Analysis and Opp...Boat Trailers Market PPT: Growth, Outlook, Demand, Keyplayer Analysis and Opp...
Boat Trailers Market PPT: Growth, Outlook, Demand, Keyplayer Analysis and Opp...IMARC Group
 
Building Your Personal Brand on LinkedIn - Expert Planet- 2024
 Building Your Personal Brand on LinkedIn - Expert Planet-  2024 Building Your Personal Brand on LinkedIn - Expert Planet-  2024
Building Your Personal Brand on LinkedIn - Expert Planet- 2024Stephan Koning
 
Graham and Doddsville - Issue 1 - Winter 2006 (1).pdf
Graham and Doddsville - Issue 1 - Winter 2006 (1).pdfGraham and Doddsville - Issue 1 - Winter 2006 (1).pdf
Graham and Doddsville - Issue 1 - Winter 2006 (1).pdfAnhNguyen97152
 
Cracking the ‘Business Process Outsourcing’ Code Main.pptx
Cracking the ‘Business Process Outsourcing’ Code Main.pptxCracking the ‘Business Process Outsourcing’ Code Main.pptx
Cracking the ‘Business Process Outsourcing’ Code Main.pptxWorkforce Group
 
Chicago Medical Malpractice Lawyer Chicago Medical Malpractice Lawyer.pdf
Chicago Medical Malpractice Lawyer Chicago Medical Malpractice Lawyer.pdfChicago Medical Malpractice Lawyer Chicago Medical Malpractice Lawyer.pdf
Chicago Medical Malpractice Lawyer Chicago Medical Malpractice Lawyer.pdfSourav Sikder
 
TalentView Webinar: Empowering the Modern Workforce_ Redefininig Success from...
TalentView Webinar: Empowering the Modern Workforce_ Redefininig Success from...TalentView Webinar: Empowering the Modern Workforce_ Redefininig Success from...
TalentView Webinar: Empowering the Modern Workforce_ Redefininig Success from...TalentView
 
Live-Streaming in the Music Industry Webinar
Live-Streaming in the Music Industry WebinarLive-Streaming in the Music Industry Webinar
Live-Streaming in the Music Industry WebinarNathanielSchmuck
 
Team B Mind Map for Organizational Chg..
Team B Mind Map for Organizational Chg..Team B Mind Map for Organizational Chg..
Team B Mind Map for Organizational Chg..dlewis191
 
BCE24 | Virtual Brand Ambassadors: Making Brands Personal - John Meulemans
BCE24 | Virtual Brand Ambassadors: Making Brands Personal - John MeulemansBCE24 | Virtual Brand Ambassadors: Making Brands Personal - John Meulemans
BCE24 | Virtual Brand Ambassadors: Making Brands Personal - John MeulemansBBPMedia1
 
To Create Your Own Wig Online To Create Your Own Wig Online
To Create Your Own Wig Online  To Create Your Own Wig OnlineTo Create Your Own Wig Online  To Create Your Own Wig Online
To Create Your Own Wig Online To Create Your Own Wig Onlinelng ths
 
UNLEASHING THE POWER OF PROGRAMMATIC ADVERTISING
UNLEASHING THE POWER OF PROGRAMMATIC ADVERTISINGUNLEASHING THE POWER OF PROGRAMMATIC ADVERTISING
UNLEASHING THE POWER OF PROGRAMMATIC ADVERTISINGlokeshwarmaha
 
Anyhr.io | Presentation HR&Recruiting agency
Anyhr.io | Presentation HR&Recruiting agencyAnyhr.io | Presentation HR&Recruiting agency
Anyhr.io | Presentation HR&Recruiting agencyHanna Klim
 
IIBA® Melbourne - Navigating Business Analysis - Excellence for Career Growth...
IIBA® Melbourne - Navigating Business Analysis - Excellence for Career Growth...IIBA® Melbourne - Navigating Business Analysis - Excellence for Career Growth...
IIBA® Melbourne - Navigating Business Analysis - Excellence for Career Growth...AustraliaChapterIIBA
 
Borderless Access - Global Panel book-unlock 2024
Borderless Access - Global Panel book-unlock 2024Borderless Access - Global Panel book-unlock 2024
Borderless Access - Global Panel book-unlock 2024Borderless Access
 
Slicing Work on Business Agility Meetup Berlin
Slicing Work on Business Agility Meetup BerlinSlicing Work on Business Agility Meetup Berlin
Slicing Work on Business Agility Meetup BerlinAnton Skornyakov
 
Borderless Access - Global B2B Panel book-unlock 2024
Borderless Access - Global B2B Panel book-unlock 2024Borderless Access - Global B2B Panel book-unlock 2024
Borderless Access - Global B2B Panel book-unlock 2024Borderless Access
 
Entrepreneurship & organisations: influences and organizations
Entrepreneurship & organisations: influences and organizationsEntrepreneurship & organisations: influences and organizations
Entrepreneurship & organisations: influences and organizationsP&CO
 
Plano de marketing- inglês em formato ppt
Plano de marketing- inglês  em formato pptPlano de marketing- inglês  em formato ppt
Plano de marketing- inglês em formato pptElizangelaSoaresdaCo
 

Último (20)

Mihir Menda - Member of Supervisory Board at RMZ
Mihir Menda - Member of Supervisory Board at RMZMihir Menda - Member of Supervisory Board at RMZ
Mihir Menda - Member of Supervisory Board at RMZ
 
Boat Trailers Market PPT: Growth, Outlook, Demand, Keyplayer Analysis and Opp...
Boat Trailers Market PPT: Growth, Outlook, Demand, Keyplayer Analysis and Opp...Boat Trailers Market PPT: Growth, Outlook, Demand, Keyplayer Analysis and Opp...
Boat Trailers Market PPT: Growth, Outlook, Demand, Keyplayer Analysis and Opp...
 
Building Your Personal Brand on LinkedIn - Expert Planet- 2024
 Building Your Personal Brand on LinkedIn - Expert Planet-  2024 Building Your Personal Brand on LinkedIn - Expert Planet-  2024
Building Your Personal Brand on LinkedIn - Expert Planet- 2024
 
Graham and Doddsville - Issue 1 - Winter 2006 (1).pdf
Graham and Doddsville - Issue 1 - Winter 2006 (1).pdfGraham and Doddsville - Issue 1 - Winter 2006 (1).pdf
Graham and Doddsville - Issue 1 - Winter 2006 (1).pdf
 
Cracking the ‘Business Process Outsourcing’ Code Main.pptx
Cracking the ‘Business Process Outsourcing’ Code Main.pptxCracking the ‘Business Process Outsourcing’ Code Main.pptx
Cracking the ‘Business Process Outsourcing’ Code Main.pptx
 
Chicago Medical Malpractice Lawyer Chicago Medical Malpractice Lawyer.pdf
Chicago Medical Malpractice Lawyer Chicago Medical Malpractice Lawyer.pdfChicago Medical Malpractice Lawyer Chicago Medical Malpractice Lawyer.pdf
Chicago Medical Malpractice Lawyer Chicago Medical Malpractice Lawyer.pdf
 
TalentView Webinar: Empowering the Modern Workforce_ Redefininig Success from...
TalentView Webinar: Empowering the Modern Workforce_ Redefininig Success from...TalentView Webinar: Empowering the Modern Workforce_ Redefininig Success from...
TalentView Webinar: Empowering the Modern Workforce_ Redefininig Success from...
 
Live-Streaming in the Music Industry Webinar
Live-Streaming in the Music Industry WebinarLive-Streaming in the Music Industry Webinar
Live-Streaming in the Music Industry Webinar
 
Team B Mind Map for Organizational Chg..
Team B Mind Map for Organizational Chg..Team B Mind Map for Organizational Chg..
Team B Mind Map for Organizational Chg..
 
BCE24 | Virtual Brand Ambassadors: Making Brands Personal - John Meulemans
BCE24 | Virtual Brand Ambassadors: Making Brands Personal - John MeulemansBCE24 | Virtual Brand Ambassadors: Making Brands Personal - John Meulemans
BCE24 | Virtual Brand Ambassadors: Making Brands Personal - John Meulemans
 
To Create Your Own Wig Online To Create Your Own Wig Online
To Create Your Own Wig Online  To Create Your Own Wig OnlineTo Create Your Own Wig Online  To Create Your Own Wig Online
To Create Your Own Wig Online To Create Your Own Wig Online
 
WAM Corporate Presentation Mar 25 2024.pdf
WAM Corporate Presentation Mar 25 2024.pdfWAM Corporate Presentation Mar 25 2024.pdf
WAM Corporate Presentation Mar 25 2024.pdf
 
UNLEASHING THE POWER OF PROGRAMMATIC ADVERTISING
UNLEASHING THE POWER OF PROGRAMMATIC ADVERTISINGUNLEASHING THE POWER OF PROGRAMMATIC ADVERTISING
UNLEASHING THE POWER OF PROGRAMMATIC ADVERTISING
 
Anyhr.io | Presentation HR&Recruiting agency
Anyhr.io | Presentation HR&Recruiting agencyAnyhr.io | Presentation HR&Recruiting agency
Anyhr.io | Presentation HR&Recruiting agency
 
IIBA® Melbourne - Navigating Business Analysis - Excellence for Career Growth...
IIBA® Melbourne - Navigating Business Analysis - Excellence for Career Growth...IIBA® Melbourne - Navigating Business Analysis - Excellence for Career Growth...
IIBA® Melbourne - Navigating Business Analysis - Excellence for Career Growth...
 
Borderless Access - Global Panel book-unlock 2024
Borderless Access - Global Panel book-unlock 2024Borderless Access - Global Panel book-unlock 2024
Borderless Access - Global Panel book-unlock 2024
 
Slicing Work on Business Agility Meetup Berlin
Slicing Work on Business Agility Meetup BerlinSlicing Work on Business Agility Meetup Berlin
Slicing Work on Business Agility Meetup Berlin
 
Borderless Access - Global B2B Panel book-unlock 2024
Borderless Access - Global B2B Panel book-unlock 2024Borderless Access - Global B2B Panel book-unlock 2024
Borderless Access - Global B2B Panel book-unlock 2024
 
Entrepreneurship & organisations: influences and organizations
Entrepreneurship & organisations: influences and organizationsEntrepreneurship & organisations: influences and organizations
Entrepreneurship & organisations: influences and organizations
 
Plano de marketing- inglês em formato ppt
Plano de marketing- inglês  em formato pptPlano de marketing- inglês  em formato ppt
Plano de marketing- inglês em formato ppt
 

Tb

  • 1. 2. B THEORETICAL BACKGROUND Meaning and Definition of Inventory The inventory represents an essential component for the assets of the enterprise and the economic analysis gives them special importance because their accurate management determines the achievement of the activity object and the financial results. The efficient management of inventory requires ensuring an optimum level for them, which will guarantee the normal functioning of the activity with minimum inventory expenses and funds which are immobilized. Every enterprise needs inventory for smooth running of its activities. It serves as a link between production and distribution processes. There is, generally, a time lag between the recognition of a need and its fulfillment. The greater the time – lag, the higher will be the requirements for inventory. The unforeseen fluctuation in demand and supply of goods also necessitate the need for inventory. It also provides a cushion for future price fluctuation. The inventory means aggregate of those items of tangible personal property which (i) Are held for sale in ordinary course of business. (ii) Are in process of production for such sales. (iii) They are to be currently consumed in the production of goods or services to be available for sale. Inventories are expandable physical articles held for resale for use in manufacturing a production or for consumption in carrying on business activity such as merchandise, goods purchased by the business which are ready for sale. The inventory is of the trader, who does not manufacture it. Thus in the study of inventory the raw materials, stores and spare parts,consumables, finished goods and work-in-process have been included as inventories. Firm also manufactures inventory to supplies. Supplies included office and plant cleaning materials It is therefore quite natural that inventory which helps in maximize profit occupies the most significant place among current assets. DVH-IMSR Page 48
  • 2. A Study on Effectiveness and Application of Inventory Control Techniques Taking the form of tangible current assets, the inventory is found in all the production stages and is successively transformed from raw materials in elements of unfinished production (work-in-process), then in finished goods destined for sale. Factors Influences the Level of each Component of Inventory Raw Material Inventory: 1. The volume of safety stock against material shortages that interrupt production. 2. Considerations of economy in purchase. 3. The outlook for future movements in the price of materials. 4. Anticipated volume of usage and consumption. 5. The efficiency of procurement and inventory control function. 6. The operating costs of carrying the stocks. 7. The costs and availability of funds for investment in inventory. 8. Storage capacity. 9. Re-component cycle. 10. Indigenous or foreign. 11. The lead-time of supply. 12. Formalities for importing. Work-in-process Inventory: 1. The length of the complete production process. 2. Management policies affecting length of process time. 3. Length of process in runs. 4. Action that speeds up the production process, e.g. adding second or third production shifts. 5. Management’s skills in production scheduling and control. 6. Volume of production. 7. Sales expectations. 8. Level of sales and new orders. 9. Price level of raw materials used, wages and other items that enter production cost and the value added in production. 10. Customer requirements. 11. Usual period of aging. DVH-IMSR Page 49
  • 3. A Study on Effectiveness and Application of Inventory Control Techniques Finished Goods Inventory: 1. The policy of the management to gear the production to meet the firm order in hand. 2. The policy to produce for anticipated orders and stock keeping. 3. Goods required or the purpose of minimum and safety stocks. 4. Sales policies of the firm. 5. Need for maintaining stability in production. 6. Price fluctuations for the product. 7. Durability, spoilage and obsolescence. 8. Distribution system. 9. Ability to fill orders immediately. 10. Availability of raw material on seasonal basis while customer’s demand spread throughout the year. 11. Storage capacity. Stores and Spares Inventory: 1. Nature of the product to be manufactured and its lead-time of manufacture. 2. State of technology involved. 3. Consumption’s patterns. 4. Lead time of supply. 5. Indigenous or foreign. 6. Minimum and safety stock and ordering quantities. 7. Capacity utilization. 8. Importing formalities. Some of the important inventory policies relates to : 1. minimum, maximum and optimum stocks; 2. safety stocks, order quantities, order levels and anticipated stocks; 3. waste, scrap spoilage and defective; 4. policies relating to alternative use; 5. policies relating to order filling; Pricing of Raw Materials When issues are made out of various lots purchased at varying prices, the problem arises as to which of the receipt price should be adopted for valuing the materials requisitions. DVH-IMSR Page 50
  • 4. A Study on Effectiveness and Application of Inventory Control Techniques 1. First In First Out Method(FIFO) 2.Last In First Out Method(LIFO) 3.Highest In First Out Method(HIFO) 4.Base Stock Method 5.Simple Average Method 6.Weighted Average Method 1. First In First Out Materials received first will be issued first. The price of the earliest consignment is taken first and when that consignment is exhausted the price of the next consignment is adopted and so on. This method is suitable in times of falling prices, because the material charge to production will be high while the replacement cost of materials will be low. FIFO method of costing is used to introduce the subject of materials costing. The FIFO method of costing issued materials follows the principle that materials used should carry the actual experienced cost of the specific units used. The method assumes that materials are issued from the oldest supply in stock and that the cost of those units when placed in stock is the cost of those same units when issued. FIFO is one method used to determine Cost of Goods Sold for a business. Merits of FIFO Method: This method is suitable during the period of decreasing of prices. It is simple to understand and easy to calculate. A stock is valued at the current purchase price, the value of closing stock represent current market price. De-merits of FIFO Method: This method is not suitable during the period of increasing prices. If this method is adopted during increase in price this method leads to tax liability. 2. Last In First Out LIFO Method: Materials received last will be issued first. The price of the last consignment is taken first and when that consignment is exhausted the price of the second last consignment is adopted and so on. In timing of rising prices this method will show a charge to production, which is closely related to current price levels provided that the last purchase is made recently. This method is the opposite of the FIFO method. It assumes that the DVH-IMSR Page 51
  • 5. A Study on Effectiveness and Application of Inventory Control Techniques material which is purchase last is issued first. Hence, material issues are priced on the basis of the cost of most recent purchases. Merits of LIFO Method: This method is suitable during the period of increasing of prices It is simple to understand and easy to calculate No under or over recovery of cost as material are issued at actual cost price. As a stock is valued at the current purchase, the value of the closing stock represents current market prices. De-merits of LIFO Method: This method is not suitable during the period of decreasing prices. If this method is used at the time of decreasing prices, it leads to increase in the tax liability. This method will lead to fluctuations in cost of different jobs. 3. Weighted Average Cost Method Under this method, material issued is priced at the weighted average cost of material in stock: WAC = Value of material in stock/Quantity in stock. 4. Standard Price Method Under this method a standard price is predetermined. The price of issues predetermined for a stated period taken into account all the factors affecting price such as anticipated market trends, transportation charges, and normal quantity of purchase. Standard prices are determined for each material and material requisition are priced at standards irrespective of the actual purchase price. Any difference between the standard and actual price results in materials price variance. 5. Current price According to this method, material issued is priced at their replacement or realizable price at the time of issue. So the cost at which identical material could be purchased from the market should be ascertained and used for valuing material issues DVH-IMSR Page 52
  • 6. A Study on Effectiveness and Application of Inventory Control Techniques Valuation of Stocks: There are three important types of inventories carried by a manufacturing organization: (i) Raw material inventory (ii) Work-in-process inventory, and (iii) Finished goods inventory. The valuation of work-in-process and finished goods inventory depend on: (i) The method used for pricing materials, and (ii) The manner in which fixed manufacturing overhead costs are treated. Since the methods for pricing materials have been discussed earlier, let us look at how fixed manufacturing overheads costs are treated for this purposes, two systems of costing are used: 1. Direct costing and 2. Absorption costing Under direct costing, fixed manufacturing overheads costs are treated as period costs and not as product costs. Put differently, they are charged directly to the income statement and hence not reflected in the valuation of inventories. Under absorption costing, on the other hand, fixed manufacturing overheads cost are treated as product costs and not period costs. Hence inventory valuation reflects an allocated share of fixed manufacturing overhead costs. Quite naturally, the valuation of work-in-process and finished goods inventory is lower, ceteris paribus, under direct costing and higher under absorption costing. Further, when the inventory level increases, the reported profit under direct costing is lower that the reported profit under absorption costing. By the same token, when the inventory level decreases, the reported profit under direct costing is higher than what it is under absorption costing. Control of Inventories Inventories consist of raw materials, stores, spares, packing materials, consumables, works-in-progress and finished products in stock either at the factory or deposits. The maintenance of inventory means blocking of funds and so it involves the interest and opportunity cost to the firm. In many countries great emphasis is placed on inventory management. Efforts are made to minimize the stock of inputs and outputs by DVH-IMSR Page 53
  • 7. A Study on Effectiveness and Application of Inventory Control Techniques proper planning and forecasting of demand of various inputs and producing only that much quantity which can be sold in the market. In general, a good inventory management implies their formation at a level that will ensure both the requirements of the production process and the demand on the market, but will also allow the achievement of the company‟ s performance indicators. Control of inventory, which typically represents 45% to 90% of all expenses for business, is needed to ensure that the business has the right goods on hand to avoid stock-outs, to prevent shrinkage (spoilage/theft), and to provide proper accounting. Many businesses have too much of their limited resource, capital, tied up in their major asset, inventory. Worse, they may have their capital tied up in the wrong kind of inventory. Inventory may be old, worn out, shopworn, obsolete, or the wrong sizes or colors, or there may be an imbalance among different product lines that reduces the customer appeal of the total operation. THE ANALYSIS OF INVENTORY CONTROL SYSTEM The financial management of firms pursues broad coverage regarding inventory, but in terms of financial analysis, we consider relevant the inventory structure and its rotation. The inventory structure allows the financial analyst to highlight the following aspects: the oversize or sub dimensioning of inventory elements; highlighting inactive inventory or slow-moving inventory, which generates expenditures; the evolution over time of inventory structure. The relevant inventory for an enterprise is: raw materials, work-in-process and finished goods. The increase of the share of raw materials within total inventory reflects the following aspects: the oversize of stock supply; the existence of inactive or slowly moving raw materials; reducing other categories of inventory due to the shortening of the production cycle and the speeding of distribution. Objectives of Inventory Control The primary objectives of inventory control are: (i) To minimize the possibility of disruption in the production schedule of a firm for want of raw material, stock and spares. DVH-IMSR Page 54
  • 8. A Study on Effectiveness and Application of Inventory Control Techniques (ii) To keep down capital investment in inventories. So it is essential to have necessary inventories. Excessive inventory is an idle resource of a concern. The concern should always avoid this situation. The investment in inventories should be just sufficient in the optimum level. The major dangers of excessive inventories are: (i) the unnecessary tie up of the firm‟ s funds and loss of profit. (ii) excessive carrying cost, and (iii) the risk of liquidity The effective inventory control system should (i) maintain sufficient stock of raw material in the period of short supply and anticipate price changes. (ii) ensure a continuous supply of material to production department facilitating uninterrupted production. (iii) minimize the carrying cost and time. (iv) maintain sufficient stock of finished goods for smooth sales operations. (v) ensure that materials are available for use in production and production services as and when required. (vi)ensure that finished goods are available for delivery to customers to fulfil orders, smooth sales operation and efficient customer service. (vii) minimize investment in inventories and minimize the carrying cost and time. (viii) protect the inventory against deterioration, obsolescence and unauthorized use. (ix) maintain sufficient stock of raw material in period of short supply and anticipate price changes. (x) control investment in inventories and keep it at an optimum level. Inventory Control Features and Benefits Following are some of the major features and benefits of the Inventory Control system • Scope we can obtain necessary information for supporting buying and selling operations. DVH-IMSR Page 55
  • 9. A Study on Effectiveness and Application of Inventory Control Techniques • Stock and non stock items We can use the Inventory Tracking flag in the Item Location file to set up items as stock in an inventory location and non stock in a supply location. • Bin control We can control the bins you use for receipts, issues, incoming inspection, lots, and serial numbered items. We can also control storage space limitations by bin and store items in multiple bins. • Lot, sub lot, and serial number tracking The system walks us through required detail forms to process transactions for lot and serial number tracked items. • Multiple levels of stock-on-hand balance control We can inquire on stock-on-hand detail for bins, lots, serial numbers, units of measure, allocated totals, location totals, and so on Multiple transaction types The system processes, by location, inventory receipts, issues, transfers, in transit transfers, bin transfers, physical inventory, and adjustments. • Multiple units of measure The system can track and order an item in different units of measure. • Availability control You can select the item availability calculation to include on-order and in-transit quantities. • Catch weights The system can control and track the quantity of an item by weight plus one other unit of measure. • Comment types The system lets we group item comments into user-defined types. For example, you might define comment type S as shipping instructions. • Multiple costing methods (standard, average, LIFO, and FIFO) The system can manage negative stock-on-hand quantities using the average or standard costing method. • Inventory auditing The system ensures that all the inventory transactions created in the system are defined correctly. Fixation of Norms of Inventory Holdings Either by the top management or by the materials department could set the norms for inventories. The top management usually sets monitory limits for investment in inventories. The materials department has to allocate this investment to the various items DVH-IMSR Page 56
  • 10. A Study on Effectiveness and Application of Inventory Control Techniques and ensure the smooth operation of the concern. It would be worthwhile if norms of inventories were set by the management by objectives, concept. This concept expects the top management to set the inventory norms (limit) after consultation with the materials department. A number of factors enter into consideration in the determination of stock levels for individual items for the purpose of control and economy. Some of them are: 1. Lead time for deliveries. 2. The rate of consumption. 3. Requirements of funds. 4. Keeping qualities, deterioration, evaporation etc. 5. Storage cost. 6. Availability of space. 7. Price fluctuations. 8. Insurance cost. 9. Obsolescence price. 10. Seasonal consideration of price and availability. 11. EOQ (Economic Order Quantity), and 12. Government and other statuary restriction The fixation of inventory levels is also known as the demand and supply method of inventory control. Carrying too much or too little of the inventories is detrimental to the company. If too little inventories are maintained, company will have to encounter frequent stock outs and incur heavy ordering costs. Very large inventories subjects the company to heavy inventory carrying cost in addition to unnecessary ties up of capital. Minimum Level The minimum level of inventories of their reorder point may be determined on the following bases: 1 Consumption during lead-time. 2 Consumption during lead-time plus safety stock. 3 Stock out costs. 4 Customers irritation and loss of goodwill and production hold costs. DVH-IMSR Page 57
  • 11. A Study on Effectiveness and Application of Inventory Control Techniques To continue production during Lead Time it is essential to maintain some inventories. Lead Time has been defined as the interval between the placing of an order (with a supplier) and the time at which the goods are available to meet the consumer needs. Maximum Level The upper limit beyond which the quantity of any item is not normally allowed to rise is known as the “Maximum Level”. It is the sum total of the minimum quantity, and ECQ. The fixation of the maximum level depends upon a number of factors, such as, the storage space available, the nature of the material i.e. chances of deterioration and obsolescence, capital outlay, the time necessary to obtain fresh supplies, the ECQ, the cost of storage and government restriction. Re-Order Level Also known as the „ordering level‟ the reorder level is that level of stock at which a purchase requisition is initiated by the storekeeper for replenishing the stock. This level is set between the maximum and the minimum level in such a way that before the material ordered for are received into the stores, there is sufficient quantity on hand to cover both normal and abnormal circumstances. The fixation of ordering level depends upon two important factors viz, the maximum delivery period and the maximum rate of consumption. Re-Order Quantity The quantity, which is ordered when the stock of an item falls to the reorder level, is know as the reorder quantity or the EOQ or the economic lot size. Economy Order Quantity The EOQ refers to the order size that will result in the lowest total of order and carrying costs for an item of inventory. If a firm place unnecessary orders it will incur unneeded order costs. If a firm places too few order, it must maintain large stocks of goods and will have excessive carrying cost. By calculating an economic order quantity, the firm identifies the number of units to order that result in the lowest total of these two costs. DVH-IMSR Page 58
  • 12. A Study on Effectiveness and Application of Inventory Control Techniques Reorder Point The reorder point is the level of inventory at which the firm places an order in the amount of EOQ. If the firm places the order when the inventory reaches the reorder point, the new goods will arrive before the firm runs out of goods to sell. In designing reorder point subsystem, three items of information are needed as inputs to the subsystem. 1. Usage rate- This is the rate per day at which the item is consumed in production or sold to customers. It is expressed in units. It may be calculated by dividing annual sales by 365 days 2. Lead time-- This is the amount of time between placing an order and receiving goods. This information is usually provided by the purchasing department. The time to allow for an order to arrive may be estimated from a check of the company‟ s record and the time taken in the past for different suppliers to fill orders. 3. Safety stock-- The minimum level of inventory may be expressed in terms of several days‟ sales. The level can be calculated by multiplying the usage rate and time in the number of days that the firm wants to hold as a protection against shortages. Re-order point = (Usage rate)(Lead time + Days of safety) = (Lead Time x Consumption rate) + Safety stock. The probabilistic approach is found to be cumbersome and unfeasible for a multi period problem. It is proposed an order point whereby an order is placed. When inventory reaches so many units Re-order point S (L) +F√SR (L) L = Lead Time R = Average number of units per order F = Stock out acceptance factor. The foregoing analysis is based on certain simplifying assumption. In the real worked some additional consideration ought to be taken into account: (i) Anticipated scarcity of raw material (ii) Expected price charge (iii)Obsolescence risk (iv)Government restriction on inventory (v) Competitive market.
  • 14. A Study on Effectiveness and Application of Inventory Control Techniques Inventories Control Techniques Store / Inventory control technique is the important tool in the hands of the modern management. It is indispensable for each and every manufacturing concern. The following are the important techniques of store control. ABC Analysis of Inventories ABC analysis is always a better control system. Under this method inventory items are classified in to three categories such as ABC basing upon its value and cost significance. The number of items and the value of each class are expressed as percentage of the total and categorize as under (i) Items of high value and small in numbers termed as 'A' (ii) Items of moderate value and moderate in number is termed as 'B' (iii)Items of small in value and large in number is termed as 'C' The ABC inventory control technique is based on the principle that a small portion of the items may typically represent the bulk of money value of the total inventory used in the production process, while a relatively large number of items may from a small part of the money value of stores. The money value is ascertained by multiplying the quantity of material of each item by its unit price. According to this approach to inventory control high value items are more closely controlled than low value items. Each item of inventory is given A, B or C denomination depending upon the amount spent for that particular item. “A” or the highest value items should be under the tight control and under responsibility of the most experienced personnel, while “C” or the lowest value may be under simple physical control. The relative position of these items show that items of category A should be under the maximum control, items of category B may not be given that much attention and item C may be under a loose control. DVH-IMSR Page 60
  • 15. A Study on Effectiveness and Application of Inventory Control Techniques Table No 2.1 Particulars A item B item C item Control Tight Moderate Loose Requirement Exact Exact Estimated Check Close Some Little Expenditure Regular Some No Posting Industrial Individual Group/none Safety Stock Low Medium High After classification, the items are ranked by their value and then the cumulative percentages of total value against the percentage of item are noted. A detailed analysis of inventory may indicate above figure that only 10 per cent of item may account for 75 per cent of the value, another 10 per cent of item may account for 15 per cent of the value and remaining percentage items may account for 10 per cent of the value. The importance of this tool lies in the fact that it directs attention to the key items. Advantages of ABC Analysis 1. It ensures a closer and a more strict control over such items, which are having a sizable investment in there. 2. It releases working capital, which would otherwise have been locked up for a more profitable channel of investment. 3. It reduces inventory-carrying cost. 4. It enables the relaxation of control for the „C‟ items and thus makes it possible for a sufficient buffer stock to be created. 5. It enables the maintenance of high inventory turnover rate. Fixation of various stock levels: Under this method various stock levels are fixed scientifically to avoid over stocking and under stocking of materials. Over stocking of materials leads to unnecessary blockage of materials and investment and under stocking of material leads to disputation in production. These are the following stock levels which help for planning of materials. DVH-IMSR Page 61
  • 16. A Study on Effectiveness and Application of Inventory Control Techniques Economic ordering quantity: Economic ordering quantity is that quantity of material which are to be ordered in one time in order to minimize ordering cost, carrying cost as well as cost of holding stock. Perpetual inventory system: Perpetual inventory system is defined as "a system of records maintained by the controlling department which reflects the physical movement of stocks and their current balances."Bin card and store ledger constitute the bedrock of perpetual inventory system. It is a method of recording store after every receipt & every issue and their current balances to avoid closing down the firm for stock taking. To ensure accuracy the physical verification may be made which must have to agree with the balance of Bin Card & store ledger. If there is any discrepancy between the two, it may be adjusted by preparing debit note and credit note. Perpetual Inventory System of inventory control is the maintenance of inventory control on a continuous basis. After the material are received into the stores, the storekeeper will arrange for the storing of each item in the allotted rack, bin, shelf or other receptacles and attach a card to each bin for the purpose of making entries there-in, relating to the receipts, issues and balance. The bin card or the locker card, this becomes a perpetual inventory record for each item of stores. If the stores balance is recorded on continuous basis after every receipt and issue, the record is said to be one of perpetual inventory and the method of recording is called the perpetual inventory system. Thus the perpetual inventory is a method of recording store balance after every receipt and issue to facilitate regular checking and to obviate closing down for stock locking .As a perpetual inventory record, the bin card records the receipt, issues and the balance of every item of stores only in physical quantities, and not in value. The advantages of a continuous stocktaking where perpetual inventory records are maintained may thus be summarized as follows: (i) The elaborate and costly work involved in periodic stock taking can be avoided. (ii) The stock verification can be done without the necessity of closing down the factory. (iii)The preparation of interim financial statement becomes possible. (iv)Discrepancies are easily located and corrected immediately. (v) It ensure a reliable check on the stores. DVH-IMSR Page 62
  • 17. A Study on Effectiveness and Application of Inventory Control Techniques (vi)It exercises a moral influence on the stores staff. (vii) Fast and slow moving items can be distinguished and the fixation of proper stock levels prevents not only over-stocking, but under-stocking also. (viii) A perpetual inventory record of the nature of the bin cards enables the storekeeper to keep an eye on the stock levels, and replenish the stock of every item whenever the limit falls to the reorder level. (ix)It provides reliable information to the management of the number of units, and the value of every item of stores. (x) It ensures secrecy of the items that are verified. Controlling Inventory The reasons for inventory control are: • Helps balance the stock as to value, size, color, style, and price line in proportion to demand or sales trends. • Help plan the winners as well as move slow sellers • Helps secure the best rate of stock turnover for each item. • Helps reduce expenses and markdowns. • Helps maintain a business reputation for always having new, fresh merchandise in wanted sizes and colours. Controlling inventory does not have to be an onerous or complex proposition. It is a process and thoughtful inventory management. There are no hard and fast rules to abide by, but some extremely useful guidelines to help your thinking about the subject. A five step process has been designed that will help any business bring this potential problem under control to think systematically thorough the process and allow the business to make the most efficient use possible of the resources represented. The final decisions, of course, must be the result of good judgment, and not the product of a mechanical set of formulas. STEP 1: Inventory Planning Inventory control requires inventory planning. Inventory refers to more than the goods on hand in the retail operation, service business, or manufacturing facility. It also represents goods that must be in transit for arrival after the goods in the store or plant are sold or DVH-IMSR Page 63
  • 18. A Study on Effectiveness and Application of Inventory Control Techniques used. An ideal inventory control system would arrange for the arrival of new goods at the same moment the last item has been sold or used. The economic order quantity, or base orders, depends upon the amount of cash (or credit) available to invest in inventories, the number of units that qualify for a quantity discount from the manufacturer, and the amount of time goods spend in shipment. STEP 2: Establish order cycles If demand can be predicted for the product or if demand can be measured on a regular basis, regular ordering quantities can be setup that takes into consideration the most economic relationships among the costs of preparing an order, the aggregate shipping costs, and the economic order cost. When demand is regular, it is possible to program regular ordering levels so that stock-outs will be avoided and costs will be minimized. STEP 3: Balance Inventory Levels Efficient or inefficient management of merchandise inventory by a firm is a major factor between healthy profits and operating at a loss. There are both market-related and budget- related issues that must be dealt with in terms of coming up with an ideal inventory balance: • Is the inventory correct for the market being served? • Does the inventory have the proper turnover? • What is the ideal inventory for a typical retailer or wholesaler in this business? To answer the last question first, the ideal inventory is the inventory that does not lose profitable sales and can still justify the investment in each part of its whole. Customer will be especially irritated if the item out of stock is one they would normally expect to find from such a supplier. Repeated experiences of this type will motivate customers to become regular customers of competitors. STEP 4: Review Stocks Items sitting on the shelf as obsolete inventory are simply dead capital. Keeping inventory up to date and devoid of obsolete merchandise is another critical aspect of good inventory control. This is particularly important with style merchandise, but it is important with any merchandise that is turning at a lower rate than the average stock DVH-IMSR Page 64
  • 19. A Study on Effectiveness and Application of Inventory Control Techniques turns for that particular business. One of the important principles newer sellers frequently find difficult is the need to mark down merchandise that is not moving well. STEP 5: Follow-up and Control Periodic reviews of the inventory to detect slow-moving or obsolete stock and to identify fast sellers are essential for proper inventory management. Taking regular and periodic inventories must be more than just totaling the costs. Any clerk can do the work of recording an inventory. However, it is the responsibility of key management to study the figures and review the items themselves in order to make correct decisions about the disposal, replacement, or discontinuance of different segments of the inventory base. Caution and periodic review of reorder points and quantities are a must. Individual market size of some products can change suddenly and corrections should be made. COMMON CHARACTERISTICS OF INVENTORIES Inventories share the following characteristics: Inventory represent a financial investment for the company Inventories become part of the cost of goods sold and are therefore a business expenses. The availability of the right item at the right time is necessary for operating any production process or satisfies a demand by a customer for a finished product. Economic Order Quantity One of the major inventory management problem to be resolved is how much inventory should be added when inventory is replenished .If the firm is buying raw materials, it has to decide lots in which it has to be purchased on each replenishment. If the firm is planning a production run, the issue is how much production to schedule. These problems are called order quantity problems. The task of the firm is to determine economic order quantity. The economic order quantity is that inventory level which minimizes the costs. DVH-IMSR Page 65
  • 20. A Study on Effectiveness and Application of Inventory Control Techniques Determine economic inventory level involves two types of costs. a) Ordering costs The term ordering costs includes the entire costs of acquiring raw materials. They include cost incurred in the following activities : requisitioning purchase ordering, transporting, receiving, inspecting and ordering cost increases in proportion to the number of orders placed except clerical and staff costs on a pro –data basis. Ordering costs increases with the number of orders : thus the more frequently inventory is acquired ,the higher the firms ordering costs. On the other hand if the firm maintains the inventory levels, there will be few orders placed and ordering costs will be relatively small. Thus ordering costs decreases with increasing size of inventory. b) Carrying costs : Costs incurred for maintaining a given level of inventory called carrying costs.They include storage, insurance, taxes, deterioration and obsolescence. The storage costs comprise cost of storing space, stores handling costs of clerical and staff service costs incurred in recording and providing facilities. Carrying costs vary with inventory size. It is contrary to that of ordering costs which decline with increase in inventory size .The economic size of inventory would thus depend on trade off between carrying costs and ordering costs. Assumptions of the EOQ Model: The basic EOQ model is based on the following assumptions: 1. The forecast usage / demand for a given period; usually one year, is known. 2. The usage / demand is even throughout the period. 3. Inventory orders can be replenished immediately (there is no delay in placing and receiving orders). 4. There are two distinguishable cost associated with inventories: costs of ordering and costs of carrying. 5. The cost per order is constant regardless of the size of order. 6. The cost of carrying is a fixed percentage of the average value of inventory. EOQ Formula: For determining the EOQ formula we shall use the following symbols: U = annual usage / demand DVH-IMSR Page 66
  • 21. A Study on Effectiveness and Application of Inventory Control Techniques Q = quantity ordered F = Cost per order C = per cent carrying cost P = price per unit TC = total costs of ordering and carrying. Given the above assumptions and symbols, the total cost of ordering and carrying inventories are equal to TC = U * F + Q * P * C Q 2 Benefits of Holding Inventory Holding of inventories results in a following benefits. Quick Services: A customer desires a prompt fulfillment of orders. A firm will have to make the goods available for sale. In the event of its not being able to offer quick service to customers, the latter are likely to get their orders executed by competitors. Reduction in Order Costs Each order increases certain costs. If the number of orders is reduced, it is possible to economize on these costs or the procedure involving each other need not be repeated each time. Discounts: A firm is in position to take advantage of trade discounts by placing bulk order with suppliers. A proper proportion will have to be maintained between the costs of maintaining inventories and the discount that is likely to be gained. Effects of holding high stock Increased storage costs. Increased risk of obsolescence. Increased capital investment, which reduces the capital available for other activities and projects. DVH-IMSR Page 67
  • 22. A Study on Effectiveness and Application of Inventory Control Techniques Cost of holding inventories Inventories tie up funds. They also expose a firm to a number of risks and costs. The different costs are material cost, cost of ordering, holding or carrying the inventory, under stocking costs and over-stocking costs. Material Cost: This is the cost of purchasing goods plus the transportation and handling charges. Order Cost: This is a variable cost of placing an order for goods. The cost of ordering also includes the following costs: Stationery, typing and dispatch of orders and reminders. Rent and depreciation on the space and equipment utilized by the concerned purchasing personnel. Insurance expenditure incurred to protect goods against fire and other risks etc. Cost of Carrying Inventories The components of these costs are: The cost of capital that is the cost of the money invested in the inventory. The salaries and statutory payment of stores personnel. Cost of tying of funds: When funds are invested in the inventory, it is obvious that they are not available for any other use. Cost of under stocking: Excess inventories represent additional and unnecessary cost. Under stocking or out-of- stock cost is due to the non-stocking of an inventory. Cost of overstocking: It is basically opportunity cost arising out of the investment in inventory for a longer period than necessary. DVH-IMSR Page 68
  • 23. A Study on Effectiveness and Application of Inventory Control Techniques 3 RESEARCH DESIGN Inventory Inventory in general means “stock of goods”. It covers the stock of raw materials, components, spare parts; work in process or semi-finished goods and finished goods. Inventories constitute the most significant part of current asset of a large majority in India. On the average, inventories are approximately 60% of the current asset in public companies in India. Because of the large size of inventories maintained by firms, a considerable amount of fund is required to be committed in them. Inventory can be reviewed as idle resources of any kind having an economic value. They are those goods which are procured, stored and used for the day to day functioning of an organization. The term inventory includes materials-raw, in process, finished packaging, spares and others stocked in order to meet an unexpected demand or distribution in the future. Inventory can be used to refer to the stock on hand at a particular time of raw materials, goods-in-process of manufacture, finished products, merchandise purchased for resale, and the like, tangible assets which can be seen, measured and counted. In connection with financial statements and accounting records, the reference may be the amount assigned to the stock of goods owned by an enterprise at a particular time. COMMON CHARACTERISTICS OF INVENTORIES Inventories share the following characteristics: Inventory represent a financial investment for the company Inventories become part of the cost of goods sold and are therefore a business expenses. The availability of the right item at the right time is necessary for operating any production process or satisfies a demand by a customer for a finished product. DVH-IMSR Page 69
  • 24. A Study on Effectiveness and Application of Inventory Control Techniques OBJECTIVE OF INVENTORY CONTROL SYSTEM: In the context of inventory, the firm is faced with the problem of meeting two conflicting needs: To maintain a large size of inventory for efficient and smooth production and operations. To maintain a minimum investment in inventories to maximize profitability. Both excessive and inadequate inventories are not desirable. These are two danger points within which the firm should operate. The objective of inventory management should be to determine and maintain optimum level of inventory investment. The optimum level of inventory will lie between two danger points of excessive and inadequate inventories. The firm should always avoid a situation of over investment or under-investment in inventories. The major dangers of over investment are: a) Unnecessary tie-up of the firm‟ s funds and loss of profit b) Excessive carrying costs, and c) Risk of liquidity. The excessive level of inventories consumes funds of the firm, which cannot be used for any other purpose, and thus, it involves an opportunity cost. The carrying costs, such as the cost of storage, handling, insurance, recording and inspection, also increase in proportion to the volume of inventory. These costs will impair the firm‟ s profitability further. Excessive inventories carried for long-period increase chances of loss of liquidity. It may not be possible to sell inventories in time and at full value. Raw materials are generally difficult to sell as the holding period increases. There are exceptional circumstances where it may pay to the company to hold stocks of raw materials. This is possible under conditions of inflation and scarcity. Work in process is far more difficult to sell. Similarly, difficulties may be faced to dispose of finished goods inventories as time lengthens. The downward shifts in market and the seasonal factors may cause finished goods to be sold at low prices. Another danger of carrying excessive inventory is the physical deterioration of inventories while in storage. In case of certain goods or raw materials deterioration occurs with the passage of time, or it may be due to mishandling and improper storage facilities. These factors are within the control of management, unnecessary investment in inventories can thus, be cut down. DVH-IMSR Page 70
  • 25. A Study on Effectiveness and Application of Inventory Control Techniques Maintaining an inadequate level of inventories is also dangerous. The consequences of underinvestment in inventories are: a) Production hold-ups and b) Failure to meet delivery commitments Inadequate raw materials and work in process inventories will result in frequent production interruptions. Similarly, if finished goods inventories are not sufficient to meet the demands of customer regularly, customers may shift to competitors, which will amount to a permanent loss to the firm. The aim of inventory management, thus, should be to avoid excessive and inadequate levels of inventories and to maintain sufficient inventory for the smooth production and sales operations. Efforts should be made to place an order at the right time with the right source of acquire the right quantity at the right price and quality. An effective inventory management should: Ensure a continuous supply of raw materials to facilitate uninterrupted production. Maintain sufficient stocks of raw materials in periods of short supply and anticipate price changes. Maintain sufficient finished goods inventory for smooth sales operation and efficient customer service. Minimise the carrying cost and time. Control investment in inventories and keep it at an optimum level. To maintain adequate accountability of inventory assets. To facilitate purchasing economies. To contribute to profitability. OBJECTIVES OF THE STUDY: 1. To known the procedure /methods used in maintaining inventory levels and provide accurate information about inventory management. 2. To known the inventory control techniques. 3. To achieve the use of ratio analysis as a tool for measuring the effectiveness of inventory control system. DVH-IMSR Page 71
  • 26. A Study on Effectiveness and Application of Inventory Control Techniques OPERATIONAL DEFINATION OF THE CONCEPTS Inventory: Inventory is used to designate the aggregate of those items of tangible property which are held for sale in the ordinary course of business and goods which are in process of production for such sale and also goods currently consumed in the production of goods or services. Thus inventory means stock of items kept in reserve for certain period of time. It includes raw materials, work in progress, semi finished goods, finished goods and spare parts for the maintenance of equipment. Current Assets: Current assets are all those assets which change their form and substance and which are ultimately converted into cash during the normal operating cycle of business i.e. 12 months. In short all those assets which are changed into cash within a year are called current assets. Current liabilities: Current liabilities refer to all short term obligations or liabilities which are required to be repaid within a period of one year out of short term or current assets. They include bills payable, sundry creditors‟ bank overdraft etc. Sales: Cost of Goods Sold: Refers to opening stock of finished goods+ Purchase of finished goods + direct expenses- closing stock of finished goods. PURPOSE OF THE STUDY The inventory control helps in providing information to efficiently managing the flow of materials, effectively utilize people and equipment, coordinate internal activities, and communicate with customers. Thus this study provides the information which helps in making more accurate and timely decisions to manage operations in the organization. SCOPE OF THE STUDY: The scope of the study is- 1. Present practices being followed at HIDP. 2. Management performances in controlling the inventory. DVH-IMSR Page 72
  • 27. A Study on Effectiveness and Application of Inventory Control Techniques LIMITATION OF THE STUDY The project has some of the limitation are as follows:- 1) Some data which are given may not be up to date. 2) More emphasis is given to the secondary data. 3) There were some people who did not respond and much information was not obtained. So it was not possible to go in depth. 4) The finance information is not given in depth, may be because of security. 5) As market is fast changing and hence accurate calculation of value of stock is practically not possible TOOLS AND TECHNIQUES FOR COLLECTION OF DATA The research design for the study was assessed and collected by the particular information provided by the company regarding all types of stocks or inventories. The following tools and techniques were used for collecting the data: A. For collecting primary data Information provided by company executives and managers. B. For collecting secondary data Company websites Company handbook Previous records METHODOLOGY Research methodology represents the strategies involves in collecting and analyzing data collected, in order to have meaningful interpretations of the research findings. This section attempts to give an insight into the way and manner in which this research was carried out. This includes the mode of data collection, how these data were analyzed and the research design. Methods of Data Collection Essential information for this research work were collected through primary and secondary sources the combinations include: (i) Interview with some key personnel in the stores, purchasing, production and inventory DVH-IMSR Page 73
  • 28. A Study on Effectiveness and Application of Inventory Control Techniques departments of the company. (ii)Observation of the production process was done to see the flow of goods in the conversion process. Materials handling and storage were also observed and so was the patrol /inspection procedures. (iii) Record analysis of relevant data was obtained from the company‟ s annual report and journals. (iv)Theoretical background information was gathered through review of related literature on inventory management. Financial analysts have sounded enough warning on the danger expose to the long run profitability as well as continuity of business concern when its inventories are left unmanaged. First, a company, which neglects it management of inventory, runs the risk of production bottlenecks and subsequently unable to maintain the minimum investment it requires to maximized profit. Second, inventories that are inefficiently managed may apart from affecting sales create an irreparable loss in market for companies operating in highly competitive industry. Invariably, a company must neither keep excess inventories to avoid an unnecessary tying down of funds as well as loss in fund due to pilferage, spoilage and obsolescence nor maintain too low inventories so as to meet production and sales demand as at when needed. Therefore, the mere fact that ineffective inventory management affects virtually the organizational objectives necessitates this type of research work. The analysis of the inventory was made using ratios; ABC analysis and inference were drawn. Graphs are shown to pictorial depict the data. Findings are summarized and suggestions were made based on data. Type of research was-descriptive research aimed at identifying some of the key problem areas in the field of inventory management. Data source was –primary as well as secondary data source (last 4 years data on inventory). Data collection tool used was-website and company‟ s internal data. DVH-IMSR Page 74
  • 29. A Study on Effectiveness and Application of Inventory Control Techniques METHODS OF ANALYSIS Measure of Effectiveness of Inventory Control 1. Size of Inventory = Total inventory/Total Current assets 2. Size of Raw material Inventory = Raw material inventory/Total inventory 3. Size of Work in Process Inventory = Work in process Inventory/Total Inventory 4. Size of Stores and Spares parts Inventory = Stores and Spares parts inventory/Total Inventory 5. Size of Finished Goods Inventory = Finished goods inventory/Total inventory 6. Overall inventory turnover ratio = Cost of goods sold/average total inventories at cost 7. Raw material inventory turnover ratio = Annual consumption of Raw material / Average Raw material inventory 8. Work-in-process inventory turnover ratio = Cost of manufacture/average work-in- process inventory at cost 9. Finished Goods inventory turnover ratio = Cost of goods sold / Average finished stock 10. Stores and spare parts inventory turnover ratio = Stores and Spares consumed/Average stock of stores and spares 11. Age of Finished Goods inventory = 365/Finished Goods inventory turnover ratio 12. Average age of raw material inventory = 365/Raw material inventory turnover ratio 13. Average age of Work-in-Process inventory = 365/Work-in-Process inventory turnover ratio 14. Age of Stores and spare parts inventory = 365/Stores and spare parts inventory turnover ratio 15. Inventory holding period = 365/Inventory turnover ratio DVH-IMSR Page 75
  • 30. A Study on Effectiveness and Application of Inventory Control Techniques FINANCIAL RATIOS Ratio analysis has a wider application as a measure of inventory control among most manufacturing firms. Some of the important ratios are explained below: (1) Inventory to Sales (Total Inventory/Sales for the Period) The ratio explains variations in the level of investment. An increase in inventory levels, substantially beyond that which might be expected from an increase in sales, may reflect such phenomena as the result of a conscious policy shift to higher stock levels, of unintended accumulation of unsold stocks, and of inventory speculation, or simply stocking in anticipation of an almost certain surge of orders. (2) Inventory Turnover (Cost of Goods Sold/Average Inventory) The ratio tells us the rapidity with which the inventory is turned over into receivables through sales. Generally, the higher the inventory turnover, the more efficient the management of a firm is. However, a relatively high inventory turnover ratio may be the result of too low a level of inventory and frequent stock outs. Therefore, the ratio must be judged in relation to the past and expected future ratios of the firm and in relations of similar firms or the industry average or both. (3) Sales to Inventory (Annual Net Sales/Inventory at the End of Fiscal Period) The ratio indicates the volume of sales in relation to the amount of capital invested in inventories. When inventory for a firm is larger in relation to sales (the condition which causes it to have a lower net sales to inventory ratio than other firms) the firm‟ s rate of return is less since it has more working capital tied up in inventories than has the firm with a higher ratio. (4) Inventory to Current Assets (Total Inventory/Total Current Assets) The ratio indicates the amount of investment in inventory per rupee of current assets investment. Generally an increasing proportion of inventory is indicative of inefficient inventory management. The ratio may also indicate the state of liquidity position of concern. The lower the inventory to current assets lowers the liquidity as compared to other current assets, viz., receivables, cash and marketable securities. (5) Inventories Expressed in Terms of Number of Days Sales (Inventory/Sales x 365) The ratio indicates the size of inventory in terms of number of day‟ s sales. For this purpose first the sales per day are calculated and inventory is divided by the amount of DVH-IMSR Page 76
  • 31. A Study on Effectiveness and Application of Inventory Control Techniques sales per day. The increasing inventory in terms of number of day‟ s sales may indicate either accumulation of inventory or decline in sales. Inventory for this purpose is assumed to include finished goods only. While the former situation signifies poor inventory management, the later indicates the poor performance of the marketing department. (6) Sundry Creditors to Inventory (Sundry Creditors/Inventory) The ratio reveals the extent to which inventories are procured through credit purchases. Inventories for this purpose are assumed to include raw materials and stores and spares only. If the ratio is less than unity, it reveals that the credit available is lower than the total inventory required. It also explains the extent of inventory procured through cash purchases. Indirectly it emphasizes the inventory financing policy of the firm. If the ratio is more than one, it explains that the entire inventory is purchased on credit. (7) Inventory to Net Working Capital (Inventory/Net Working Capital) The ratio explains the amount of inventory per rupee of equity/long-term financed portion of current assets. A higher ratio may mean greater amount of net working capital investment in inventory. In order to control each category of inventory, the following ratios can be calculated. The inventory represents an essential component for the assets of the enterprise and the economic analysis gives them special importance because their accurate management determines the achievement of the activity object and the financial results. The efficient management of inventory requires ensuring an optimum level for them, which will guarantee the normal functioning of the activity with minimum inventory expenses and funds which are immobilized. The paper presents an analysis model for inventory management based on their rotation speed and the correlation with the sales volume illustrated in an adequate study. The highlighting of the influence factors on the efficient inventory management ensures the useful information needed to justify managerial decisions, which will lead to a balanced financial position and to increased company performance.