ABC ANALYSIS

In ABC analysis, classification is done to group the items according to Annual Sales Volume (quantity X landed price), to identify the small number of items that account for most of the sales volume and that are the most important ones to control for effective inventory management. This is based on "Paretos Law" (named for the late Italian economist Vilfredo Pareto) which basically states that, in general, 80% of the results of any process are produced by 20% of the contributing factors. Applied to inventory, this means that approximately 20% of your inventory items are responsible for 80% of stock sales. And, for the above reasons, these items (i.e. the top 20%) more often can be counted.

The ABC classification process is an analysis of a range of items, such as finished products into three categories: A - Outstandingly important; B - Average importance; C - Relatively unimportant

Each category is handled in a different way as they are of varying importance in the inventory, with more attention being devoted to category A, less to B, and least to C. ABC Classification is done according to products Annual Sales Volume.

Steps taken for ABC Analysis:

1. Calculated the annual usage for each item in the inventory (Total units issued in the year multiplied by unit cost). 2. Calculated the total annual usage (usage for all items); 3. Calculated each item's percentage of the total usage (item usage/total usage); 4. Listed the items in reverse order on the basis of percentage of total usage; 5. Calculated the cumulative percent of total at each item's position; 6. Examined the annual usage distribution; and 7. Established the breakpoints for A, B, and C items.

EOQ

Economic Order Quantity (EOQ): The amount of orders that minimizes total variable cost required to order and hold inventory.

The cost of inventory under the EOQ model involves a tradeoff between inventory holding costs (the cost of storage, as well as the cost of tying up capital in inventory rather than investing it or using it for other purposes) and order costs (any fees associated with placing orders, such as delivery charges). Ordering a large amount at one time will increase a small business's holding costs, while making more frequent orders of fewer items will reduce holding costs but increase order costs. The EOQ model finds the quantity that minimizes the sum of these costs .

The EOQ is based on the following assumptions: 1. Order arrives instantly 2. No stock out 3. Constant rate of demand Calculation of EOQ:

1. Total inventory cost = holding cost + ordering cost = (Order quantity/2) x holding cost per unit per year + (annual demand/order quantity) x cost per order

2. Optimal order quantity (Q*) is found when

Annual holding cost = Ordering cost

Annual demand is projected sales quantity for next year. A growth of 18% on current year sales is considered as annual demand for calculating EOQ for the company.

HOLDING COST OR CARRYING COST:

In business management, holding cost is money spent to keep and maintain a stock of goods in storage.

The most obvious holding costs include rent for the required space; equipment, materials, and labor to operate the space; insurance; security; interest on money invested in the inventory and space, and other direct expenses.

Holding cost also includes the opportunity cost of reduced responsiveness to customers' changing requirements, slowed introduction of improved items, and the inventory's value and direct expenses, since that money could be used for other purposes.

Annual holding cost = average inventory level x holding cost per unit per year

Holding Cost per Unit The holding cost of the company is calculated as below: Total Holding Cost = Fixed Cost + Insurance + Opportunity Cost i. Fixed Cost a. Rent of warehouse b. Salary of the warehouse in charge and salary of the back office employee. c. Electricity Charges for the warehouse. ii. Insurance Taken Re. 1.95 per Rs. 1000 of the Average Inventory iii. Opportunity Cost The prevailing bank rate on Average Inventory is considered.

The Holding Cost was allocated to each product according to the value contributed by each product in inventory. This was further divided by Inventory turnover to get Holding Cost per Unit

ORDERING COST It is the cost involved in placing an order irrespective of the quantity.

Annual ordering cost = no. of orders placed in a year x cost per order
= Annual demand/order quantity x cost per order

The ordering cost for the company is negligible in case of products procured from two of its supplier hence ordering cost was not considered for those products.

Ordering Cost per order The ordering cost of the company is calculated as below:

Loading and unloading Number of orders = Annual Demand/Q* Time between orders = No. of working days per year / number of order.

Methodology for EOQ in Gulshan Fabrics

As there are numbers of inventory items in the company so we taken a sample of 5 major products to calculate the EOQ which are as under : Error! Not a valid link. Error! Not a valid link. Here, Annual Demand and raw material cost is given by the company.

Setup cost is assumed by us as they dont have any information regarding the fixed setup cost.

Holding cost is also given by the company i.e. 17% (12% is interest and 5% is manpower) EOQ is calculated by putting all the figures into the formula mentioned above.

Reorder level Reorder level shows that when the inventory position or level falls below to this point a reorder is placed. This can be calculated with the formula: R=dL

Here d is Average daily demand and L is Lead time.

Here, Annual Demand and lead time is given by the company. For average daily demand, we divide the annual demand by 365 days. Reorder level is computed by putting all the values into the formula mentioned above. Total annual cost

Total annual cost can be calculated with the help of formula:

TC = DC+DS/Q+QH/2

Here D is annual demand, C is Raw material cost, S is setup cost, Q is EOQ, and H is holding cost.

Product Name
jacquard fabrics

EOQ

TC

13.00

8,151,566.62

plain fabrics

14.95

1,925,416.53

bridal fabrics

60.45

14,596,312.97

Limitations of the EOQ (Economic Order Quantity) Model

It is very important to understand the limitations to which the analysis is subject to. The EOQ is based on the following Assumptions

The firm knows with certainty the annual usage (consumption) of a particular item of the inventory.

 The rate at which the firm uses the inventory is steady over time. The orders placed to replenish inventory stocks are received at exactly that point in time when inventory reach zero.

Organizational structure: CHAIRMAN

VICE CHAIRMAN

CEO

SENIOR VICE PRESIDENTS

MANAGING DIRECTOR

CFO

HEAD-OPERATIONS (PCBU)

HEAD CAR PLANT

HEAD CAR PLANT FINANCE

HEAD BUSINESS PLANNING

HEAD QUALITY HEAD HUMAN RESOURCE HEAD MANUFACTURING HEAD CMS HEAD SYSTEM HEAD PRODUCTION PLANNING

HEAD LOGISTICS HEAD MPC HEAD SQIG

HEAD PURCHASE

MATERIALS

VENDOR DEVELOPMENT

Chairman

Mr. Ratan Tata

Vice Chairman

Mr. Ravi Kant

CEO Managing Director (India Operations) Chief Financial Officer Operations Head (India)PCBU

Mr. Carl-Peter Foster

Mr. P.M. Telang

Mr. C. Ramakrishnan

Mr. Girish Wagh

Organizational Structure (PCBU)

Head (Car Plant)

Mr. Vikram Sinha

Head (Finance) AGM

Mr. R. H. Mane

Mr. K Somaskandan

Mr. Suhas P Kulkarni