CHAPTER-I

INTRODUCTION

1
INTRODUCTION
Inventory control is vitally important to almost every type of business, whether
product or service oriented. Inventory control touches almost every facets if operations. A
proper balance must be struck to maintain proper inventory with the minimum financial
impact on the customer. Inventory control is the activities that maintain stock keeping items
at desired levels. In manufacturing since the focus is on physical product, inventory control
focus on material control.
“Inventory” means physical stock of goods, which is kept in hands for smooth and
efficient running of future affairs of an organization at the minimum cost of funds blocked in
inventories. The fundamental reason for carrying inventory is that it is physically impossible
and economically impractical for each stock item to arrive exactly where it is needed, exactly
when it is needed.
Inventory management is the integrated functioning of an organization dealing with
supply of materials and allied activities in order to achieve the maximum co-ordination and
optimum expenditure on materials. Inventory control is the most important function of
inventory management and it forms the nerve center in any inventory management
organization. An Inventory Management System is an essential element in an organization. It
is comprised of a series of processes, which provide an assessment of the organization’s
inventory.

2
NEED OF THE STUDY
Materials are equivalent to cash and they make up an important part of the total cost. It is
essential that materials should be properly safeguarded and correctly accounted. Proper
control of material can make a substantial contribution to the efficiency of a business.
The success of a business concern largely depends upon efficient purchasing, storage,
consumption and accounting.
 The cost of production is increased recently due to the wide usage of SUJANA
METAL PRODUCTS company products.
 As requirement of raw material is increased there is a need for the effective
maintenance of inventory management.
"For every industry the Inventory plays a vital role". Better Inventory control leads to better
capital usage .The Company should look after the Inventory effectively which results in
optimum level of raw materials & finished goods that will smooth in production process.
"Inventory plays a vital role. Hence the study of inventory management in SUJANA
METAL PRODUCTS has been selected for the project work".

SCOPE OF THE STUDY

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  The study is done on inventories held by manufacturing division of SUJANA
METAL PRODUCTS The scope of the study includes the abc Analysis of Raw
Materials, wip and Finished Goods for five financial years.

 This study provides insight to the management of High Value items and also brings
attention of management towards movement of ‘A’ class items over period of 5 years.
 The study also covers other areas like the financial ratios for the period of 2016 to
2020.

OBJECTIVES OF THE STUDY

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 To study on the stocking level of the company that is minimum level, maximum level &
re- ordering level.

 To know whether the company is facing any stock outs recently.

 To review the abc Analysis and understand the impact of business dynamics on inventory.

 To make a brief study on the analysis of the store items.

RESEARCH METHODOLOGY

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The economy of a country is controlled by several factors, viz., population size industrial
activities, agriculture, polices of its government, culture of the people, educational system,
infrastructure facilities, etc. in the process of satisfying the basic needs people engage
themselves in various activities such agriculture, housing and each of the above industries is
backed by various other industries.
Sources of Information:
This study is drafted from secondary data.
Secondary Data:
Since the study is aimed at the financial aspects of SUJANA METAL PRODUCTS , the
whole data has been gathered from :
1. Annuals reports of the company.
2. Broachers of the company library books.
3. Library books.
4. The period of the study has been taken from 2016-2020.
Main limitation is due to their busy schedule the employees in the organization are unable to
spend their time with me.

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LIMITATIONS OF THE STUDY:
 Since the study covers only Manufacturing division of the company, it may
not represent the overall scenario of the company.
 Project duration of time is not sufficient.
 One of the factors are the study was the lack of availability of sample
information.
 The information is mostly depended upon secondary data.
 Main limitation is due to their busy schedule the employees in the
organization are unable to spend their time with me.

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 CHAPTER-II
REVIEW OF LITERATURE

REVIEW OF LITERATURE

8
A tangible property held finished goods, work in process, raw material concluding
maintenance, and consumables.
MEANING OF INVENTORY:
The inventory refers to the stock pile of the product a firm offering for sale the components
that make up the product. In other words, inventory is composed of assets that will be sold in
future in the normal course of business operations. The assets which firms store as inventory
in anticipation of need can be classified into
1. Raw materials.
2. Work-in-progress(semi-finished goods).
3. Finished goods.
(1). RAW MATERIALS:-
Inventory contains items are purchased by the firm from others and are converted into
finished goods through the manufacturing process. They are important inputs for the final
product.
(2). WORK-IN-PROCESS:-
Inventory consists of items currently being used in the production process.
They are normally partially or semi-finished goods that are at various stages of production in
a multi stage production process.

(3). FINISHED GOODS:-

It represents final or completed products which are available for sale, the
inventory of such goods consists of items that have been produced but are yet to be sold. The
job of the final manager is to reconcile the conflicting view points of the various functional
areas regarding the appropriate inventory levels in order to fulfill the over all objectives of
maximizing the owner’s wealth.
IMPORTANCE OF INVENTORY:-
Inventory plays cardinal role in every organization. The profit of the organization mainly
depends on the inventory. Inventory is the second largest value in the organization. It is the
liquid asset and the current asset of the organization. Inventory storage is in important
activity in the organization.
OBJECTIVES OF INVENTORY MANAGEMENT:
The objectives of the inventory management consist of two counter balancing parts:

9
a) To maximize the firms investment in inventory.
b) To meet a demand for the product by efficiently organizing the firms production and
sales operation.
c) Ensure a continuous supply of raw materials to facilitate uninterrupted production.
d) Minimize the carrying cost and time.
These two conflicting objectives inventory management can also be expressed in terms of
cost and benefits associated with inventory. An optimum level of inventory should be
determined on the basis of the tradeoff between cost and benefits associated with the levels of
inventory.
ARTICLES
Article 1
Title: Inventory Management of Remanufacturable Products
Author:L. BerilToktay
,
Journals:ManagementsciencePublished Online:1 Nov 2000

Abstract:We address the procurement of new components for recyclable products in the
context of Kodak's single-use camera. The objective is to find an ordering policy that
minimizes the total expected procurement, inventory holding, and lost sales cost.
Distinguishing characteristics of the system are the uncertainty and unobservability
associated with return flows of used cameras. We model the system as a closed queueing
network, develop a heuristic procedure for adaptive estimation and control, and illustrate our
methods with disguised data from Kodak. Using this framework, we investigate the effects of
various system characteristics such as informational structure, procurement delay, demand
rate, and length of the product's life cycle.

Article 2

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Title:Inventory Management with Asset-Based Financing
Author:Rachel Q. ZhangPublished Online:1 Sep
Journals:ManagementScience

Abstract: Most of the traditional models in production and inventory control ignore the
financial states of an organization and can lead to infeasible practices in real systems. This
paper is the first attempt to incorporate asset-based financing into production decisions.
Instead of setting a known, exogenously determined budgetary constraint as most existing
models suggest, we model the available cash in each period as a function of assets and
liabilities that may be updated periodically according to the dynamics of the production
activities. Furthermore, our models allow different interest rates on cash balance and
outstanding loans, which is an enhancement over most traditional models in that inventory
financed by a loan may be more expensive than that by out-of-pocket cash. We demonstrate
the importance of joint consideration of production and financing decisions in a start-up
setting in which the ability to grow the firm is mainly constrained by its limited capital and
dependence on bank financing. We then explain the motivation for asset-based financing by
examining the decision making at a bank and a set of retailers in a newsvendor setting.

Article 3
Title: Inventory management system
Author:Donald G. BauerRichard J. Campero

Journal: us patent
Abstract:Methods, systems, and articles of manufacture consistent with certain aspects
related to the present invention collect item information from RFID tags attached to items in
an inventory, and uses the collected item information to perform various inventory
management processes. In one aspect, the inventory management processes may include
determining, reporting, and/or providing corrective actions for one or more events associated
with at least one of depletions of items in the inventory, changes in the design of items in the
inventory, defects with one or more items, misplaced items, the movement of an unusual
umber of items within a short period of time (i.e., shrinkage), and malfunctions of one or
more components included in the environment.
Article 4

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Title:Risk Aversion in Inventory Management
,
Author: David Simchi-LeviPeng Sun

Journal: operation research

Abstract:Traditional inventory models focus on risk-neutral decision makers, i.e.,

characterizing replenishment strategies that maximize expected total profit, or equivalently,
minimize expected total cost over a planning horizon. In this paper, we propose a framework
for incorporating risk aversion in multiperiod inventory models as well as multiperiod models
that coordinate inventory and pricing strategies. We show that the structure of the optimal
policy for a decision maker with exponential utility functions is almost identical to the
structure of the optimal risk-neutral inventory (and pricing) policies. These structural results
are extended to models in which the decision maker has access to a (partially) complete
financial market and can hedge its operational risk through trading financial securities.
Computational results demonstrate that the optimal policy is relatively insensitive to small
changes in the decision-maker's level of risk aversion.

Article 5
Title: Managing carbon footprints in inventory management

Author:David Simchi-LeviPeng Sun

journal:International Journal of Production Economics

Abstract:There is a broad consensus that mankind must reduce carbon emissionsto mitigate
global warming. It is generally accepted that carbon emission trading is one of the most
effective market-based mechanisms to curbthe amount of carbon emissions. This paper
investigates how firms manage carbon footprints in inventory management under the carbon
emission trading mechanism. We derive the optimal order quantity, and analytically and
numerically examine the impacts of carbon trade, carbon price, and carbon cap on order
decisions, carbon emissions, and total cost. We make interesting observations from the
numerical examples and provide managerial insights from the analytical results.

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Article 6
Title:Industrial aspects and literature survey: Combined inventory management and routing
Author:Donald G. BauerRichard J. Campero
journals:Computers & Operations Research

Abstract: This paper describes industrial aspects of combined inventory management and
routing in maritime and road-based transportation, and gives a classification and
comprehensive literature review of the current state of the research.
The literature is contrasted with aspects of industrial applications from a constructive, but
critical, viewpoint. Based on the status and trends within the field, future research is
suggested with regard to both further development of the research area and industrial needs.
By highlighting the industrial aspects, practitioners will hopefully see the benefit of using
advanced decision support systems in complex situations related to combined inventory
management and routing in their business. In addition, a classification and presentation of the
research should help and motivate researchers to further focus on inventory management and
routing challenges.

Article 7
Title:Retail Inventory Management When Records Are Inaccurate
Author:Adam J. Mersereau
Journal:Manufacturing& Service Operations ManagementVol. 10, No. 2

Abstract: Inventory record inaccuracy is a significant problem for retailers using automated
inventory management systems. In this paper, we consider an intelligent inventory
management tool that accounts for record inaccuracy using a Bayesian belief of the physical
inventory level. We assume that excess demands are lost and unobserved, in which case sales
data reveal information about physical inventory levels. We show that a probability
distribution on physical inventory levels is a sufficient summary of past sales and
replenishment observations, and that this probability distribution can be efficiently updated in
a Bayesian fashion as observations are accumulated. We also demonstrate the use of this
distribution as the basis for practical replenishment and inventory audit policies and illustrate
how the needed parameters can be estimated using data from a large national retailer. Our
replenishment policies avoid the problem of “freezing,” in which a physical inventory
position persists at zero while the corresponding record is positive. In addition, simulation

13
studies show that our replenishment policies recoup much of the cost of inventory record
inaccuracy, and that our audit policy significantly outperforms the popular “zero balance
walk” audit policy.

Article 8
Titile: Importance of Inventory management
Author: R.A.Aliev
Publication year: 2007
Abstract:Aggregate production-distribution planning (APDP) is one of the most important
activates in supply chain management (SCM). When solving the problem of APDP, we are
usually faced with uncertain market demands and capacities in production environment,
imprecise process times, and other factors introducing inhere cent uncertainty to the solution.
Using deterministic and stochastic models in such conditions may not lead to fully
satisfactory results. Using fuzzy models allows us to remove this drawback. It also facilitates
the inclusion of expert knowledge. However, the majority of existing fuzzy models deal only
with separate aggregate production planning without taking into account the interrelated
nature of production and distribution systems

Article : 9
Titile: Analysis on Inventory management
Author(s):Bhutta
Publication year : 2003
Abstract:Presents a mixed integer linear programming model for international facility
location decisions considering exchange and tariff rates. Along with location, production and
distribution functions, investment level was also considered as one of the decision variables.
This profit maximization model represents the integration of all of the above mentioned
factors thus providing an insight into how they are affected due to global factors such as
exchange and tariff rates. Determination of international facility location decisions in this
model is thus based on a collective analysis of the various supply chain factors such as
production capacity, distribution patterns and also investment levels. Encouraging results
have been obtained in terms of the model performance and results thus emphasizing the need
for integrated supply chain analysis.
Article :10
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Title : Inventory management
Author(s):PerterFredriksson
Publication year : 2006
Abstract: To identify operations and logistics insures which are critical for the operational
performance in modular assembly processes. Based on case studies of Volvo Cars, Toyota,
and Saab, the paper identifies operations and logistics issues that are critical for the
operational performance of modular assembly processes. The issues are used for extending
our understanding of the design operation of modular assembly processes. The issues
identified concern production planning, deviation handling, assembly flow balance, small
unit disadvantages and module flow control.
Inventory is the stock of goods a company uses as raw materials for the process of
production. So there is no doubt in the fact that purchasing inventory - the raw materials - is
pretty much a certainty for the business to operate. There are two basic schools of thought
governing inventory purchase. You can purchase a high amount, fewer times over a year,
avail the economies of scale and then store it in your warehouse. The inventory turnover is
the financial management tool which helps the finance manager establishes the way things
stand presently and if there needs to be a change in the way the company is going about with
its policy.

INVENTORY:

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 A tangible property held, finished goods, work in process, raw materials including
maintenance and consumables.

MEANING OF INVENTORY:
The inventory refers to the stock pile of the product a firm offering for sale the
components that make up the product. In other words, inventory is composed of assets
that will be sold in future in the normal course of business operations. The assets which
firms store as inventory in anticipation of need can be classified into
1. Raw materials
2. work-in-progress(semi finished goods)
3. finished goods

1. RAW MATERIALS:- Inventory contains items that are purchased by the firm from
others and are converted into finished goods through the manufacturing process. They are
important inputs for the final product.
2. WORK-IN-PROCESS:- Inventory consists of items currently being used in the
production process. They are normally, partially or semi-finished goods that are at
various stages of production in a multi stage production process.
3. FINISHED GOODS:-It represents final or completed products which are available
for sale, the inventory of such goods consists of items that have been produced but are yet
to be sold. The job of the final manager is to reconcile the conflicting view points of the
various functional areas regarding the appropriate inventory levels in order to fulfill the
over all objectives of maximizing the owner’s wealth.
IMPORTANCE OF INVENTORY:-
Inventory plays cardinal role in every organization. The profit of the organization mainly
depends on the inventory. Inventory is the second largest value in the organization. It is
the liquid asset and the current asset of the organization. Inventory storage is in important
activity in the organization.

OBJECTIVES OF INVENTORY MANAGEMENT:

16
 The objectives of the inventory management consist of two counter balancing parts:
 To maximize the firms investment in inventory
 To meet a demand for the product by efficiently organizing the firms production and sales
operation.
 Ensure a continuous supply of raw materials to facilitate uninterrupted production.
 Minimize the carrying cost and time.

These two conflicting objectives of inventory management can also be expressed in terms
of cost and benefits associated with inventory. An optimum level of inventory should be
determined on the basis of the trade off between cost and benefits associated with the
levels of inventory.

THE MAIN AIM OF INVENTORY MANAGEMENT

The main aim of inventory management is that they should avoid excessive and
inadequate levels of inventories &to maintain sufficient inventory for the smooth
production &sales operations effort be made to place an order at the right time with the
right source to acquire the right quality at the right place &quantity.
 Ensure a continuous supply of raw materials to facilitate uninterrupted production.
 Maintain sufficient stocks of raw materials in periods of short supply, anticipated price
customer service.
 Minimize the carrying and time.

Causes of inventory:
 External causes - customers, suppliers etc.
 Internal causes - market, policy, production and S

Problem with high inventory:

 Interests, insurance costs.
 Quality deterioration.
 Wear and tear.
 Storage and pilferage.

Inventory turnover ratio:

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 ITR=cost of production/inventory
 Higher ITR=low inventories
 Low ITR=high inventories

High inventory reasons:

 Production
 More low volume products
 Large cycle campaign product
 Non-moving products

Marketing:
 Uncertainty of orders
 Deviating sales forecast

Supply chain management:

 Improper planning
 Excess/short RM supply.
Suggestions:
 Flexible production plans with tight monitoring.
 Min & max inventory levels and their up to date revision.
 Cost benefits analysis on carrying costs.
 Review and disposal of non-moving inventory.
 Reliability should improve.
 Dynamic approach is essential.
 Coordination with market and plants.
 Adherence to commitments and time-to-time review is must
Selection of site:-
The following are the chief considerations which should determine the selection of a site:
 The site will be connected with road and rail, or if there is river transport, with
water transport.
 The existence of facilities for disposal of water or effluent water is important. For
this purpose some times special arrangements are necessary though some times it may be

18
 possible to use existing waste land. Health authorities will naturally have a say in the
matter.
 The available land should be sufficient for purpose of the unit. In addition to
factory buildings, it is often necessary to provide houses for the staff and workers.

STORES, SPARES AND PURCHASES:

 Store keeping.
 Store system.
 Stores operation.
 Methods of pricing the material issues.
 Receiving section and issue department.
 Purchase department
 Stores and spares.
 Purchasing system.
 Inventory.
STORE KEEPING:
It is serving facility, inside of an organization responsible for proper storage of the
material and then issuing it to respective department on proper requisition. those items,
which are not in use for some specific duration example spare parts and the raw
materials, are called stores and the building or space where these are kept is known is
store room.
According to Maynard “the duties of stock keeping are i.e. to receive materials are to
protect them while in storage from damage and unauthorized removal, to issue the
materials the right quantities at the right time to the right place and to provide these
service promptly at least cost”.

It is an establishment fact that more government of the current assets are invested in
stores. Thus for efficient and economic utilization of funds the importance of store cannot
be ignored.
FUNCTIONS OF STORE KEEPING:
The main function of store keeping can be outlined as
 Receiving of goods in stores against damage and pilferage.
 Custodian of goods in stores against damage and pilferage

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 Effective utilization of stores space.
 To provide service to the organization in most economic way.

OBJECTIVES OF STORE KEEPING:

 Easy location of the items in store.
 Proper identification of items.
 Speed issue of material, Efficient utilization of space

FACTORS OF PLANT LOCATION:

Primary factors:-
 Raw material
 Market
 Fuel and power
 Transport
 Labour
Secondary factors:-
 Industrial atmosphere
 Special advantage of a place
 Soil and climate
 Personal factors
 Historical factors
 Political stability

Stages in production control:-

 Planning
 Routing
 Scheduling
 Loading
 Dispatching
 Inspection
Advantages of production planning and control:-
 Efficient service
 Avoidance of rush orders

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 Avoidance of bottlenecks
 Inventory control
 Economy in production time
 Equipment utilization
Types of layout:
 Product or line layout
 Process or functional layout
 Combined layout
Factors in plant layout:
 Basis managerial policies and decisions
 Nature of plant location
 Type of industry and processes
Economies in production:
 Use of automatic machinery
 Division of labor
 Utilization of by-products
 Timely and economical repairs and maintenance.

Approach:
The importance of an integrated approach of material management with in the frame
work of the Indian environment and presents a comprehensive coverage of all aspects of
the subjects, such as the operational details of stores system and procedures and modern
mathematical concepts also featured. Since the theory is based on the practical experience
and research projects, it fulfills the needs for authentic literature in the field of materials
management.

Purpose of stores:
Store plays a vital role in the operation of a company. It is in direct touch with the user
departments in its day-to-day activities. The most important purpose served by the stores
is to provide uninterrupted service to the manufacturing divisions. Further, stores is often
equated directly with money, money is locked up in the stores.

21
 The function of stores can be classified as follows:-
 To receive raw materials, tools, equipments and other items and account for them.
 To provide adequate and proper storage and preservation to the various items.
 To meet the demands of the consuming departments by proper issues and account
for the consumption.
 To minimize obsolescence, surplus and scrap through proper codification,
preservations and handling.
 To highlight stock accumulation, discrepancies and abnormal consumption and
effect control measure.
 To ensure good house keeping so that material handling, materials preservation,
stocking, receipt and issue can be done adequately.
In India, owing to positions, 4 to 6 months inventories are not uncommon 77 and, in fact,
for certain imported items, it could be as high as 24 month’s stock. In this context, stores
management assumes greater importance.
Stores leader:-
The stores leader is very important because this facility the calculations of the value of
goods used for production purpose of materials, finished goods. There are several
methods for calculating the issue price of the materials.
1) FIFO: Under this method is first issued from the earliest consignment on hand and
priced at which that consignment was placed in the stores. In other words materials
received first are issued first. This method is most suitable in times of falling prices
because the issue price of materials to be jobs work orders will be high while the cost of
replacements of materials will be low.
2) LIFO: The issues under this method are priced in the reverse order of purchase i.e..
The price of the latest available consignment is taken. This method is sometimes known
as the replacement cost method because materials are issued at the current cost to work
orders expect when purchases were long ago. This method is suitable in times of raising
prices because material will be issued from latest consignment at a price which is closely
related to the current price levels.
3) Base stock method: Each concern always maintains a minimum quantity of material
in stock. This minimum quantity is known as safety or base stock and this should be used

22
 when an emergency arises. The objective of this method is to issue the material
according to the current prices.
4) Average method: In this method stock is divided by the quantity.
5) Market price: The issues are made at the market prices.
6) Inflated prices: This method is used for any wastage in the materials.
Location and layout:
More often than not, in the matter of locating the stores, materials management is rarely
consulted. The normal practice is to locate the stores near the consuming departments.
This minimizes handling and ensures timely dispatching stores layout, governing criteria
are easy movement of materials, good house keeping, and sufficient space for men and
materials handling equipments, such as shelves, racks, pallets and proper preservation
from rain, light and other such elements.

These problems are more important in the case of items that have a limited shelf life.
Other important factors governing the location are the number of users and their
locations, the volume and the verity of goods to be handled the location of the central
receiving section and accessibility to modes of transportation such as rail or road. Since
stores have to be nearest to the sugar, largest organizations usually have stores near
consuming department, whereas receiving is done centrally

Items of common usage are stocked in the central stores so that inventory is kept at an
optimum level. These factors are considered at the planning level of layout. In the case of
warehouses stocking finished goods, factors such as proximity to ports, railway lines,
quality of roads, availability of power, etc., become quite important. It is also important
that the stores are constructed with a futuristic orientation, so that sufficient flexibility for
expansion needs is inbuilt. The activities of receiving the goods, stocking in appropriate
locations, material handling and issue must be done swiftly and economically. The stores
building have adequate facilities for preservation of stores.

Sometimes facilities, such as cold storage, heating equipments, air conditioning and
similar facilities may be required. These should be planned in advance. Comfortable
working conditions must be provided to the stores personnel to get maximum efficiency
and morale.

23
 The important factors in the design of stores building can be summarized as follows:

Lighting:
Clear and adequate lighting is a must for a work environment. Lighting effects can be
accentuated through a judicious choice of colors for the walls. For stores personnel who
work day in and day out in the stores receiving, checking, stocking, handling and issuing
goods, a pleasing environment goes a long way in reducing monotony. Any attempt to
reduce these facilities will prove false in economizing in the long run.

Safety:
This factor is perhaps the most important aspects. In stores a large volume of goods are
handled every day. Accidents considerably reduce the morale and effectiveness of the
system. The following measures are necessary if accidents are to be checked:
 Safety consciousness should be instilled in the minds of stores, personnel through
training programmers, visual aids and literature.
 Safety appliances, such as goggles, hand gloves, etc.., must be provided and their
use must be encouraged.
 Good housekeeping is essential. This means that gangways must be clean,
adequately wide so that movement of forklifts, trolleys and industrial tractors is smooth.
Stocking must be appropriate locations so that handling is minimum.
 All stores equipment must be kept in good order. This includes adequate
maintenance practice with regard to forklifts, overhead cranes, trolleys, conveyors, etc.
operation must be trained in safety so that safety precautions are not over looker.
 Healthy competition can be stimulated by installing “safety awards” and cash
prizes which bring recognition to the concerned stores personnel for safety practices. This
also motivates other to practice safety.
 Provision of fire fighting facilities is necessary especially where inflammable
materials are stored and handled. In fact large organizations have a well maintained
fighting equipment.
 Keep the stores in preparedness. this has in the run reduced losses and reduced
insurance expenses, fire extinguisher, fire escapes, alarms and sprinklers must be
available the personnel should be familiar in handling them.

24
 Other factors which merit attention include provision of toilets, routine
maintenance equipments, safe electrical warnings, etc..,

Cost aspects and productivity:

It is covered that every cubic meter of space must be utilized by stocks for high
efficiency. Very often such stocking may drastically cut the speed of materials
movements and create bottlenecks apart from affecting overall safety. Costs involved in
stores can be analyzed under two heads, viz.., fixed and variable. Fixed costs are to be
incurred irrespective of the utilization of stores space. They include money spent on land
and buildings, rent interest, repairs, maintenance, insurance, etc. Variable costs vary with
the volume through output. They consists of handling cost, damages, deterioration,
obsolescence, etc. obviously when the throughout or the volume goods handled is high,
The total cost per tone is low. This should be the aim of the stores manager in order to
optimize the costs in stores.

Problems and development:

It is an unfortunate fact that stores management has been regulated as a critical function.
In the gamut of material management, a store is considered as the least glamorous and it
never attracts talent. It is forgotten that the stores manager is probably the custodian of
the single largest group of current assets and plays a pivotal role in ensuring smooth
production besides assisting purchase activities through timely support. This is the major
problem and challenge that stores manager faces today.

Many decisions in stores management, such as selection of tracks, bins, handling

equipment, safety practices, codification, training personnel and accounting, call for
considerable, sick and an ability to coordinate with other departments as well as with
outsides agencies. These aspects should be highlighted and appreciated so that the stores
function is given due to importance. Other areas in stores, such as records keeping,
movement analysis to reduce obsolescence, surplus and damage are critical to the
profitable operation of the firm and the stores manager faces challenges in the areas as
well.
In many organizations the scrap yard also comes under control of the stores manager.
This is an entirely new responsibility calling for the ability to maximize returns on the

25
disposal of scrap. The chief stores officer has under him separate officers for the
functions of receipt, issuem, kardex and sub-stores.

Besides coming into contact with the production, purchase maintenance, inspection and
finance departments within his organization, he has to come into contact with the
outsiders like suppliers, transport carriers and bankers. In order to meet such challenges
the importance of the stores function should gradually gain momentum and qualified
engineers should be posted as chief stores officers reporting to the materials manager.
Role of financial manager in inventory management:
Optimum level of inventory and finding ensures to the problems of EOQ are the recorder
point and the safety stock. These techniques are very essential to economize the use of
minimizing the total inventory cost. The techniques of inventory management are very
useful in data mining. The cases the board frame works for managing inventories.
To the majority of the companies, inventory represents a substantial investment. Thus the
goal of wealth maximization is related to the financial manager has an important role to
play in the management of inventory.
Although it is not his operating responsibility to control inventory. The financial should
see that only an optimum amount is invested in inventory. He should be familiar with in
inventory control techniques and ensure that inventory is managed well. Effect would be
reduce inventory investment and increase the firm’s prospects of making profits.
INVENTORY CONTROL:
Inventory control renders to “the process whereby the investment in materials and parts
carried in stock is regulated within predetermined limits set in accordance with the
inventory policy established by the management. The inventory control is activity
oriented process whereas inventory control is the management process and the later is the
firm’s setup to be followed by the former.

Inventory control refers to a planned method of purchasing and storing the material at
lowest possible cost without affecting the sales scheduled.

Inventory control therefore, is a scientific method of determining what, when and how
much to purchase and how much to stock for a given period of time.

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 The needs of inventory control:
The rewards of inventory control system cannot be over looked in the Indian context the
idea behind this is,
 Conserving valuable foreign exchanges.
 Release of capital
 Reduction in cost
The primary object of inventory control is:-
 To minimize the idle time caused by shortage of inventory and inventory
availability of inventory.
 To keep down capital investment in inventories. Inventory carrying cost and
obsolescence losses.

INVENTORY CONTROL TECHNIQUES

Selective inventory control Inventory management techniques

1. EOQ (economic order quantity)

↓
1. ABC analysis a. Ordering cost
2. XYZ analysis
3. FNS classification
b. Carrying cost
4. SOS classification
5. S-D-E Analysis
2. System of Re- ordering
6. HML analysis
7. VED classification

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 Fig 2.1
ECONOMIC ORDER QUANTITY:
One of the inventory management problems 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 to in which it has to be purchased on cash replenishment.

EOQ(Economic Order Quantity) =

√ 2∗quantityrequired∗orderingcost
Carryingcost

If the firm is planning production as per schedule. These problems are called order
quantity problem and task of the firm is to determine optimum inventory level involves
two types of costs
1. Ordering cost.
2. Carrying cost.
The economic order quantity is that inventory level, which minimizes the total of
ordering and carrying costs.

Ordering costs:-
The term ordering cost is used in case of raw materials (or supplies) and includes the
entire costs of acquiring raw materials. They include costs incurred in the following
activities. requisitioning, purchase ordering, transport receiving, inspecting and
storing(store placement), ordering cost increase in proportion to the number of orders
placed the critical and staff costs, however, don’t vary in proportion to the number orders
placed, and one view is that so long as they are committed cost they need not to be
revoked in computing ordering cost.

Carrying costs:
Cost incurred for maintaining a given level of inventory are called carrying cost, they
include storage, insurance, taxes, deterioration and obsolescence’s.

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ABC Analysis:
ABC analysis is one of widely used inventory control tool. Under this we have to classify
materials according to their importance and concentrate more on critical items.
Importance of any item arises due to the two factors namely, consumption values and
critically in use. Classification of materials according to importance has its basis on the
promise “vital few and trivial many”.

The classification based on consumption value is called ABC analysis and the
classification based on the critically of the items is called VED analysis (vital essential
and desirable).periodical consumption values are used as the basis for VED analysis.
ABC is said to denote “always better control”, the method of classification of material is
also known as “selective method control”. The basis of analyzing the annual consumption
cost (or usage cost) goes after the principle “vital few and trivial many”.

Items held in the stores can grouped into class A,B and C respectively based on their
annual consumption values. It has been found in a large number of organizations that
about 20% of the items contribute to 70% of the annual consumption value, 30% of the
number of the number of items contributes about 20% of the annual consumption value
and the remaining 50% of the items contribute 10%of the annual consumption value.

Hence consumption value need to be controlled at the highest level and these are the A
items. The control of bottom 50% of the items that contribute only 20% of the annual
consumption value, that are denoted as C items can be delegated to the lowest decision
making levels while, the middle B items can be controlled by the middle levels of
personnel.

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“The following figures bring out clearly the concept of ABC analysis”.
Category Value Item 10% % of annual Consumption
A item 20 70
B item 30 20
C item 70 10
Table 2.1

The advantage of ABC method of inventory control is follows:

It becomes possible to concentrate all efforts in areas which need genuine efforts. This
method produces better results and involves minimum control. In the case of an items
careful attention is paid at every stage i.e., estimates of requirements, purchasing safety
stocks, receipts, inspection and issues.

A close watch on high consumption items and their progress of replenishment etc,
maintained. In the case of C items which are numbers and at the same in expensive are
loosely controlled.

The items fall under B category may be dispensed within the record keeping system. This
will help in saving time, money and labor without endangering production schedule, it is
most effective and economical method as it is based on the selective method.
It helps in placing the orders, deciding the quantity of purchasing safety stocks etc. Thus
saving the organization from the unnecessary stocks outs or surpluses.

VED Analysis:
VED analysis represents classification of items based on critically the analysis classifies
the items into 3 groups called vital, essential, desirable “vital” category encompasses
those items for want of which production would come to halt.” essential” group includes
items whose stock out is very “desirable” group comprises of items which do not cause
any immediate loss of production would come is high. “Desirable” group comprises of
items which do not cause any immediate loss of production or their stock out entail
nominal expenditure and causes minor disruption for a short duration.

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 HML analysis:
HML analysis is the price based analysis. This analysis is generally used for control of
spares. The items m under this analysis are classified into 3 groups which are called
“high”, “medium”, “low”. To classify, items are listed in the descending order of their
unit price.

Ex: - the management may decide that all items of unit price above Rs 1000 will be of
‘H’ category. Those with unit price between Rs 100 to Rs 1000 will be of ‘M’ category
and those having unit price below Rs 100 will be of ‘L’ category.

F-S-N ANALYSIS:
F-S-N analysis is based on the consumption figures of the items. The items under this
analysis are classified into 3 groups.
 F-fast moving
 S-slow moving
 N-non moving
To conduct the analysis the last date of receipt or the date of issue whichever is later
taken into account and the period, usually in terms of number of months that has elapsed
since the last movement is recorded.

X-Y-Z ANALYSIS:
X-Y-Z analysis is based on value stock on hand. Items whose inventory values are high
are called ‘X’ items those inventory values are low are called ‘Z’ items and ‘Y’ items are
which have moderate inventory stocks. Usually X-Y-Z analysis is used in conjunction
with either ABC analysis or HML analysis.

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 S-OS ANALYSIS:
S-OS analysis is based on seasonality of the items and it classified the items into 2
groups.
 S- seasonal
 OS-off seasonal

S-D-E ANALYSIS:
S-D-E analysis is based on problems of procurement namely,
 Non availability
 Security
 Longer lead time
 Geographical location of suppliers
 Reliability of suppliers etc

S-D-E analysis classifies the items into 3 groups called “scare”, “difficult”, and “easy”.
The information so developed is then used to decide purchasing strategies. “Scare”
classification comprises of items which are in short supply imported through government
agencies. “Difficult” classification includes those items which are available indigenously
but are not easy to produce. “Easy” classification covers those items which are readily
available.

LEVEL SETTING:
In order to have proper control on materials the following levels are set:
 Re-order level
 Ordering level
 Minimum level
 Maximum level
 Average stock level
 Danger level
 Safety stock level

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 Re-order level:
It is the point at which if stock of a particular material in store approaches the storekeeper
should initiate the purchase requisition for fresh suppliers of the material. This level is
fixed somewhere between the maximum and minimum levels in such a way that the
difference of the quantity of the material between the re-ordering level and the minimum
level will be sufficient to meet the requirements of production up to the time fresh supply
of the material is received.

“Reorder level can be calculated by applying the following formula”:-

Ordering level = Minimum level + Consumption during the time required to get
fresh delivery

Another formula given by WHELDON in his book ‘cost accounting’ is follows:

Reordering level = Maximum consumption * Maximum reorder level period

Ordering level:
This is the quantity of stock fixed between the maximum and minimum level of stock.
When this level is reached, it becomes the duty of the store-in-charge to replenish the
stock within reasonable time. This level is usually a little higher than the minimum level.
In order to be prepared for such emergencies as abnormal consumption delay in delivery
of new supplies etc.,

While fixing this level following points are taken into consideration:-
 Time required for obtained fresh suppliers.
 Possible unexpected requirements which cannot be avoided.
 Possible unexpected delays in getting fresh suppliers because of rains war, about
unrest etc.

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 Minimum level:
Formula level represents the level beyond, which the stock in hand is not allowed to
exceed. This is because: If the exceeds this level, it will
 Involves more investment
 Requires more space for storages
 Amount to more wastage because of handling, spoilage, obsolescence
 Involves more carrying cost.

Excess stock will increase the cost of storage, thereby increasingly selling cost. Excess
stock will involve unnecessary blockade of working capital and prevent its availability
for a more profitable use. Stock in excess will prevent the management from taking
advantages of price fluctuation and favorable market condition.

The fixation of maximum level depends on the following factors:-

 Rate of consumption of the material
 Money available
 Time required to obtain deliveries
 Storage space available
 Economic order quantity
 Market conditions, seasonality and price fluctuation
 Possibility of loss due to deterioration

The following for the calculation of maximum stock level given by WHELDON is as
follows:
Maximum stock level = Re-ordering + Re-ordering – quality
(Minimum consumption X minimum re-ordering period)

Average stock level:

The average stock is calculated by the following formula

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Average stock level = minimum stock level + ½ of re order quantity of ½ minimum
stock level + maximum stock level)

Danger level:
This means levels at which normal issues are made only under specific instructions. The
purchases officer will make special arrangements to get the materials which reach at their
danger level so that the production may not stop due to storage of material danger level =
Average consumption X maximum re-order period for emergency purchase.

Safety stock level:

This level is below the minimum level and represents the stage at which emergency and
immediately steps have to be taken for getting the stock replenished

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